Fears are mounting over Government plans to raise taxes on capital gains and dividends.
According to reports, the Treasury is mulling over a range of fresh tax tweaks in an effort to fill the £50billion black hole in Britain’s finances.
Following the Bank of England’s base rate hike this week, the Chancellor Jeremy Hunt stressed that tough decisions lie ahead, suggesting tax hikes may be in the offing.
Hunt said: ‘The best thing the Government can do to bring down these rising interest rates is to show we are bringing down our debt.
‘Families up and down the country have to balance their accounts at home and we must do the same as a government.’
We consider what is being mooted ahead of the Autumn Statement on 17 November and what the implications might be for Britons.
Capital Gains Tax changes on the cards
Rumours are circulating that Hunt is looking at tinkering with Capital Gains Tax, including the possibility of changing the reliefs and allowances on the tax or increasing the tax rate altogether.
The Government made £14.3billion from Capital Gains Tax in the 2020/21 tax year, contributed to by a total of 323,000 taxpayers.
Shaun Moore, tax and financial planning expert at Quilter said: ‘The Government has been fairly open that it has a significant financial black hole to fill, and it is prepared to make tough decisions in order to fill it.
‘Tinkering with CGT might be an option as it is only paid by the minority of taxpayers, but this will depend on how far they go.’
What is Capital Gains Tax?
Capital Gains Tax (CGT) can be charged on any profit someone makes on an asset that has increased in value, when they come to sell it. This could be when selling a second home or company shares for example.
Britons are only required to pay CGT if the gain they make exceeds their £12,300 tax-free allowance in a single tax year. If this allowance is breached in a given tax year, they will be liable to pay it.
For example, someone selling a buy-to-let property for £200,000, having previously purchased it for £150,000, will have made a gain of £50,000. After their annual allowance, this taxable gain reduces to £37,700.
On residential property, CGT is currently charged at 18 per cent for basic rate taxpayers and 28 per cent for higher rate taxpayers.
However, when selling a main home people are entirely shielded from this by what is known as principal private residence relief.
For investments such as stocks and shares, basic rate taxpayers pay 10 per cent when exceeding their personal allowance, whilst higher rate and additional rate taxpayers pay 20 per cent.
Top tips to save on CGT
By Natalie Field, partner accountant at TaxScouts
1. Use your annual allowance of £12,300. It’s ‘use it or lose it’ so you can’t carry it forward to future tax years if not fully utilised.
2. Most assets can be transferred tax-free to spouses or civil partners, so it may be worth transferring to the individual who pays tax at a lower rate or who has more allowance to use.
3. Offset your losses against your gains. For example, you may have some underperforming shares which you can sell at a loss to then offset against gains made on your better performing investments.
4. Reduce your taxable income. The rate at which you pay Income Tax denotes which rate you pay for Capital Gains Tax.
5. Make investments in Isas as any gains are tax-free.
6. Spread gains over several years to make the most of the yearly allowances and lower tax brackets.
It’s also worth noting that crypto assets such as bitcoin are also charged CGT at this rate.
CGT is added to someone’s normal income to decide the tax rate it is charged at.
So, even if someone is a basic rate taxpayer, the impact of a sizeable capital gain is likely to push them into the higher rate.
For example, if someone makes a capital gain of £100,000 when selling a buy-to-let property – after their annual tax free allowance of £12,300 this gain becomes £87,700.
The basic rate tax threshold is £50,270, so if they are a basic rate taxpayer earning £30,000 a year, £20,270 of their capital gain is calculated at 18 per cent with the remaining £67,430 of the gain being taxed at 28 per cent. This means they lose £18,880 to the taxman.
The two most likely ways that the Government will target CGT are either by reducing the CGT exempt amount (currently £12,300) or aligning CGT rates to income tax.
The Office of Tax Simplification also recently recommended aligning rates closer to income tax levels.
If rates are aligned with income tax, they would go from 10 /18 per cent to 20 per cent for basic rate tax payers and from 20/28 per cent to 40 per cent or even 45 per cent for higher and additional rate taxpayers.
Shaun Moore of Quilter said: ‘Of the two options, aligning the bands is most lucrative for the treasury.
‘There is a property surcharge currently of 8 per cent which may or may not be retained if rates aligned although one imagines the surcharge might go if the rates increase across the board.
‘The alignment of rates would mean they at least double for all tax bands. Whilst it is hard to say the exact amount of revenue this would secure, you could go so far as estimating twice the tax take, which is currently close to £14billion.
‘As always, it isn’t that simple, some pay a reduced rate of 10 per cent on business assets and some pay the 8 per cent surcharge on property already but it could easily bring in significant amounts.’
|Band||Taxable income||Tax rate|
|Personal Allowance||Up to £12,570||0%|
|Basic rate||£12,571 to £50,270||20%|
|Higher rate||£50,271 to £150,000||40%|
|Additional rate||over £150,000||45%|
What would this mean for investors?
In short, investors with money outside a pension or Isa would face a tax hike on any gains.
Sarah Coles, senior personal finance analyst at Hargreaves Lansdown says: ‘It would cause a real headache for anyone who holds their portfolio in order to make income within tax wrappers and capital gains outside them.
‘At the moment, this protects their investments from the higher rate of tax, but a hike in CGT could reverse this process and force a major rethink.
‘There’s a real risk that it encourages investors to hang onto investments for life.
‘Passing them in their will could raise the issue of inheritance tax, but they have allowances to take advantage of, and at the point where they pass away, capital gains are reset to zero for tax purposes.’
What about buy-to-let landlords?
For property investors, a capital gains tax hike will likely cause the same issues – but they could feel the impact even more acutely.
‘At least with stock market investments you can realise your gains as you go along, to take advantage of your allowance each year,’ says Coles.
‘With property, you realise all the gain at once, so you can’t do this. It’s would mean an awful lot of wealth might be trapped in property for life.
‘Fewer property sales would make life harder for buyers, and could mean certain types of property are taken off the market for decades for tax reasons.’
Will Principal Private Residence Relief be targeted?
Another option reportedly being mooted is the removal of Principal Private Residence Relief – the tax relief that shields homeowners from CGT when selling their main home.
If axed, this could result in all homeowners becoming liable for any house price gains they have enjoyed to date on their own home when they come to sell.
This would therefore likely prove deeply unpopular with millions of Britons. However, according to professional buying agent, Henry Pryor, it could work if introduced with certain caveats, such as scrapping stamp duty at the same time.
Pryor says: ‘The exemption for people’s main home cost the Treasury around £30bn last year.
‘A tax on unearned income might seem like an easier sell to voters than say a cut to Universal Credit or increased duty on petrol but it would sting a bit.
‘The fact that it already applies to second home owners and to landlords suggests that the world wouldn’t stop turning if it were removed.
Whispers in Westminster of removing the Capital Gains Tax exemption for principle residence that could net @hmtreasury £30bn a year.
— Henry Pryor (@HenryPryor) November 4, 2022
Pryor adds: ‘The Government could base the gain on the value of the property in 2022 to avoid stressing people who bought years ago and it could be introduced at the same time as scrapping Stamp Duty Land Tax which many think is overdue.
‘If removed carelessly then it could knock the market and have an adverse impact on both prices and sale volumes but at the same time it might actually bring an end to boom and bust.
‘People could still improve homes to add value just as they can to second homes but the Government might expect at least 8m people who rent a property to vote to end this expensive tax give away.’
What about taxing dividends?
There are also reports that the Government is considering raising the dividend tax rate, or cutting the tax-free allowance for dividends from £2,000 to £1,000. It was previously reduced from £5,000 to £2,000 in 2017.
Dividend tax is chargeable on dividends people receive from investing in shares outside of an Isa.
If rates are hiked or the tax-free allowance is dropped, it will hurt many investors who rely on dividend payments from shareholdings to supplement their income.
Coles says: ‘This could cause problems for anyone who holds investments outside an Isa or pension.
‘At the moment, if they have too many investments to shelter them all in an ISA, they can structure their portfolio to take advantage of the £2,000 dividend allowance.
‘The disappearance of this would mean all their dividends outside tax wrappers are taxed, and it becomes a highly tax inefficient way to hold investments.
It will also deal a blow to the many small business owners who pay themselves through dividends as an alternative to a salary that would be subject to Income Tax.
‘It would also be a major headache for people who own their own business and pay themselves in dividends,’ adds Coles.
‘They are already paying a higher rate of dividend tax this year – up 1.25 percentage points.
‘And whereas people paid via PAYE are seeing the 1.25 percentage point rise in NI reversed this month, there’s no matching cut for dividend taxes. Hiking them further would add insult to injury.’
What is the tax on dividends?
From April 2022, the dividend tax rate rose by 1.25 per cent, meaning basic rate taxpayers will begin paying 8.75 per cent and higher-rate taxpayers will pay 33.75 per cent. Additional rate taxpayers are subject to 39.35 per cent.
Dividend tax is levied at three rates: 8.75 per cent for those who pay basic rate tax; 33.75 per cent for those on the higher tax rate; and 39.35 for those on the top rate of tax.
Someone paying 40p tax with £10,000 in dividend income will see their tax bill jump from £2,700 to £3,150 this year.
On top of the £2,000 allowance, it’s worth noting that at present, Britons don’t pay tax on any dividend income that falls within their Personal Allowance (the amount of income they can earn each year without paying tax).
Moore says: ‘If Sunak and Hunt want to reduce the allowance this will mean you have to pay more tax on any dividends you receive and the amount ratchets up depending on what tax band you are in.
‘If you are a basic rate taxpayer and they reduce the dividend allowance by 50 per cent – i.e. to £1000 – then you will end up paying £87.50 more in tax.
‘Similarly, if you are a higher rate tax payer this rises to £337.50 more in tax and £393.50 if you are an additional rate tax payer.’
‘If the Government chose to scrap the dividend allowance altogether then a basic rate tax payer will end up paying £175 in tax on their dividends.
‘Meanwhile a higher rate tax payer will pay £675 and an additional rate tax payer £787.
‘Dividends are a popular way of creating a regular income from investments and therefore reducing the allowance or scrapping it altogether could end up meaning those who rely on dividends for the bulk or all of their regular income will see this taxed at a much higher level.’