Our view of the changes
Capital Gains Tax and Dividend Tax changes introduced in the recent budget, reduce Capital Gains Tax (CGT) and enable investors to earn £5,000 in dividends tax free, indicating the Chancellor is giving welcome encouragement to entrepreneurs and others investing in business.
How has CGT changed?
CGT rates have been reduced from 18% to 10% for basic rate tax payers and 28% to 20% for those paying tax at a higher rate which when compared to income tax, mean CGT has been halved for both basic and higher rate payers. Furthermore, the first £11,100 of gains are tax free.
How has Dividend Tax changed?
Changes to Dividend Tax mean that the first £5,000 earned will be tax free but the rate of tax above that allowance has significantly increased.
What does it mean for YOUR investments?
A number of our clients have asked if any tweaks are needed to their investment portfolios as a result of George Osborne’s changes to the rates of tax on CGT and Dividends.
The good news is…
It is worth noting that the majority of our clients who make investments with us, have invested in ISAs and Pensions (wrapped portfolios) and neither of these products are affected by the changes in tax rates for CGT or Dividends, so that’s great news.
The other news is…
For those who hold investments outside of ISA and Pension products, the picture may be a little different.
The answer is…
The answer is that there is no right or wrong decision as to whether a portfolio outside of ISA and pension products should be constructed with a bias towards dividends or capital growth. It will very much depend on what income and dividends you receive from your non-investment portfolios. The likely scenario is that the more dividend income you have, the bias for investing should be towards capital growth assets because, if you remain a basic rate tax payer, then any gain on growth assets will only be taxed at 10%, which is more attractive than the majority of dividend tax rates and income tax.
As a rule of thumb, we always recommend that you make use of all your allowances as most of them are granted on a ‘lose them if you don’t use them’ basis!
If you have any question about the changes to CGT and Dividends and how this affects your investment planning, please do contact your usual Cullen Wealth Consultant.
