Capital gains tax and dividend tax exempt allowances halved - and halved again

Chancellor Jeremy Hunt has increased taxation on capital gains and dividends in his Autumn Statement today. He halved the capital gains tax annual exempt amount from its current level of £12,300 to £6,000 from April next year. He also announced a further future cut, halving it again from April 2024/25 to £3,000.

In a parallel move, he halved the dividend allowance to £1,000 next tax year and just £500 the year after.

CGT is levied on profits from assets, like investments and properties that are not the primary residence, when they are sold or given away.

Chris Springett, Tax Partner at wealth management and professional services firm Evelyn Partners, said that the tax only just emerged unscathed from the Spring Budget of 2021, when then-Chancellor Rishi Sunak had been expected to target it:

‘So this move on CGT is not surprising – though Hunt did not increase CGT rates, as many had expected.

‘Most CGT comes from a small number of taxpayers who make large gains[1]. The halving of the allowance increases the burden on investors and property owners at the other end of the CGT spectrum – those who have made relatively modest gains but are nevertheless drawn across a much-reduced threshold. Moreover, these taxpayers may need to file tax returns for the first time to report capital gains, causing a new admin headache.

'Also, capital gains can be deferred: as owners of assets can put off a sale in order to stave off a CGT liability, so the cut in the CGT exemption might raise less than Hunt is hoping.

‘What this does for all taxpayers, is make the case for holding investments in wrappers that afford tax protection even more compelling than it is already. Investments held in ISAs and pensions are exempt from CGT – which is why many investors never encounter the tax.

‘And it is a reminder of the sense in using allowances effectively. In terms of reducing CGT exposure, married couples and those in civil partnerships can transfer assets to each other – known as an interspousal transfer – to make use of both sets of allowances, as well as shift a potential gain to whichever partner might be exposed to a lower tax band.

Capital gains on property

‘Many second homeowners and landlords – accidental as well as buy-to-let investors - who are looking to sell a property now face a higher tax bill on the profits they have made from rising house prices[1]. The differences in tax bills from the allowance cut for some property transactions might be relatively small in absolute terms but it is the latest in a series of moves by the Treasury in the last decade that have dented the attractions of property as an investment.’

Dividend tax

'The annual tax-free dividend allowance was slashed from £5,000 in 2017/18 to just £2,000 currently – and will from April be reduced to a quite limited £1,000, and then to a very restrictive £500 in 2024/25. Together with the 1.25% increase in dividend tax rates, which was introduced in April 2022, this constitutes a real crackdown on dividends.

'This is a blow to investors who hold assets outside of ISAs and to retirees who rely on dividend income to supplement their pensions. It’s yet another reminder to make use of ISAs allowances as a tax-free umbrella for owning investments.

‘Business owners, many of whom pay themselves partially or primarily through dividends rather than salaries, will also be hit.’

NOTES

[1] In the 2020 to 2021 tax year, 45% of CGT came from those who made gains of £5million or more – a group that represents less than 1% of CGT payers. In the 2021 to 2022 tax year, the CGT on UK property service was used by 129,000 taxpayers who filed 137,000 returns to report just over £1.7 billion tax liability accrued on residential property disposals. This represents an increase in tax liability of nearly 50% in comparison to the 2020 to 2021 tax year.

https://www.gov.uk/government/statistics/capital-gains-tax-statistics/capital-gains-tax-commentary