Time is counting down for the government’s latest tax grab – slashing the tax-free dividend allowance for shareholders and investors.
The government plans to cut the allowance from £5,000 a year to £2,000 a year from April 2018.
The details were released months ago by Chancellor Phillip Hammond and have quietly been buried in other financial changes.
Taxpayers earning £5,000 in pay-outs from companies will have to pay extra tax.
This extra demand will cost basic rate taxpayers £225 at 7.5%, while higher rate taxpayers will have to hand over £975 and additional rate taxpayers £1,143.
Special rules for couples with shares
The measure hits family -owned firms and investors who hold a stake in businesses.
But they can take some measures to avoid the dividend allowance tax changes.
Couples can shift shares between each other without the worry of capital gains tax on their disposals.
Special ‘no loss, no gain’ rules for couples and civil partners exempt the transfers from CGT.
For example, if one spouse owns £150,000 in shares generating a £4,000 a year income, from April 2018, they would pay tax on half that income.
Transferring 50% of the shareholding to the other spouse, assuming they have no other share income, would mean no income tax is still paid on all the £4,000.
Switch to a tax wrapper
The couple should then hold any future investments in a tax-efficient wrapper, such as an ISA or pension.
Shares held in venture capital trusts are also exempt from the dividend tax grab.
Once money is invested in an ISA, the shares grow tax-free and no tax is paid when the funds are drawn. Every taxpayer has a £20,000 ISA allowance – and this could rise in line with inflation in Chancellor Phillip Hammond’s Autumn Budget.
For investors with more complex tax affairs, stakes in equities can be sheltered in investment bonds
The dividend tax allowance is complicated. Investors paying no income tax will still pay no tax, but basic rate taxpayers are worse off as soon as they earn a pound over the £2,000 limit, while the thresholds are £8,667 for higher rate taxpayers and £10,100 for additional rate taxpayers.