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In 2021, the Taxpayers’ Alliance discovered that the average 5-year tax burden in the UK stood at a 70-year high. Two years later, as we approach the start of a new financial year (2023-24), British taxpayers face a range of important tax changes which could bear upon their finances. In this guide, our team at Bure Valley Group outlines some of these key changes for our investor readers in light of the recent Autumn Statement.
We also suggest ideas to discuss with your financial planner to help mitigate the impact on your personal wealth. We hope you find this guide useful. To find out more about our investment opportunities, visit our portfolio page here. To enquire regarding our latest projects and funding, you can reach us via:
+44 160 334 0827
Changes to capital gains tax and dividend tax
April 2022 marked a sad day for investors as the UK’s dividend tax rates increased by 1.25% – to 8.75%, 33.75% and 39.35%. On 6 April 2023, this 1.25% increase will be abolished, bringing the dividend tax rates back down to 7.5%, 32.5% and 38.1% for those on the basic rate, higher rate and additional rate, respectively.
However, this date also marks a reduction in the dividend tax allowance. This means that the amount of dividends that investors can earn tax-free outside of an ISA will go down. Currently, an investor can earn up to £2,000 in dividends within a general investment account without getting taxed. On 6 April 2023, however, this tax-free threshold will go down to £1,000. It will reduce even further to £500 in 2024.
Investors may wish to explore making full use of their £20,000 annual ISA allowance, which allows for tax-free capital gains and dividends generated inside. Other ideas include transferring assets to your spouse/civil partner to make use of their unused allowances, or considering tax-efficient investment vehicles such as VCTs (which offer tax-free dividends).
Stamp duty changes
One tax change that was widely welcomed from the September 2022 “Mini Budget” was the increase in stamp duty exemption for first-time buyers. Before 23 September 2022, first-time buyers did not need to pay stamp duty on the first £300,000 of the property they bought. After this date, however, the tax-free threshold has risen to £425,000. This should remain in place until 31 March 2025. For investors still looking to get on the property ladder, 2023 could be a good time to consider taking the move – especially if average house prices fall, as predicted.
Bear in mind that some homeowners could see their council tax go up from 6 April 2023. From this date, councils will be able to raise council tax by up to 3% without a local referendum (and by another 2% if the council qualifies for the social care precept). Your local council website will hopefully contain more information about whether your bill may rise by up to 5%.
Income tax and National Insurance
On 6 April 2022, National Insurance (NI) went up by 1.25% for both employees and employers. This proved controversial, and the NI contribution threshold later went up in July 2022 from £9,880 to £12,570 to placate opposition. In September 2022, however, then-Chancellor Kwasi Kwarteng abolished the 1.25% rise completely. At present, in January 2023, those earning between £12,570 and £50,270 now pay 12% (not 13.25%). Individuals earning over £50,270 pay 2% as they did before the tax tinkering in April 2022, down from 3.25%.
However, the income tax system has experienced something of a restructuring. The tax-free Personal Allowance has been frozen at £12,570 until April 2028. This has been described as a “stealth tax” by critics,
The nil rate band has been frozen at £325,000 until April 2028. As a broad rule, anything valued above this threshold when an estate owner dies is taxed at 40% inheritance tax (IHT). For some investors, the danger is that keeping the nil rate band at this point will drag their estate over the threshold (e.g. due to rising inflation, pushing up the sale price of taxable assets like shares or additional property). Investors can never know the future; even the young can benefit from solid estate planning to ensure wealth is passed down to loved ones in a tax-efficient manner.
Seek a financial adviser if you wish to explore your options. Ideas include passing down wealth via a defined contribution pension (exempt from IHT in 2022-23) and using the main residence nil rate band to “extend” your IHT-free threshold by another £175,000. Many investors also own successful businesses which they hope to hand down to family members or trusted colleagues one day. Fortunately, the UK’s tax regime allows for 50% or 100% IHT relief on some of an estate’s business assets (whilst the owner is still alive and as part of the will). A business, or interest in a business, can be eligible for 100% relief whilst assets such as land, buildings or machinery owned by the deceased (and used in a business they controlled or were partnered in) might receive 50% relief.
Regardless of the relief, the deceased must own the asset(s) or business for at least 2 years before death to qualify. Also, be careful not to assume that all company assets will be eligible for IHT relief. Non-profit organisations do not qualify and neither do companies dealing primarily with securities, stocks or shares (e.g. those making/holding investments). A business cannot usually be inherited IHT-free if it is being wound up or sold.
How higher earners can invest tax-efficiently
One way to mitigate capital gains tax (CGT), is simply to spread your gains across different tax years (assuming you can wait). Another idea is to invest in companies which qualify for the Enterprise Investment Scheme (EIS). Here, an investor can claim up to 30% income tax relief on EIS investments (worth up to £1m in a given tax year). If you then hold your shares for at least three years and then sell them, any profit you make is 100% free of CGT – even if you have already used up your ISA and CGT allowance.
Another is to consider setting up a special purpose vehicle (SPV) for mitigating taxes on specific aspects of your portfolio. If you hold 10-20 Buy To Let properties, as an example, then the rental yield is subject to income tax (e.g. 40% as a Higher Rate taxpayer) unless you take steps to put them inside an appropriate business structure – such as SIC codes 68100, 68209 and/or 68320. Doing so would allow your rental yields to be subject to corporation tax, which at 19% in 2021-22 would likely be far lower than your income tax band. However, you should consider seeking financial advice before rushing to adjust your portfolio in this fashion. It could affect other aspects of your financial plan and limit your investment options in the future.
Interested in finding out more about the exciting startup projects we have on offer to investors here at Bure Valley Group? Get in touch today to start a conversation with our team and discuss some of the great investment memorandums we have available here:
+44 160 334 0827