HOW TO CUT YOUR DIVIDEND TAX LIABILITY

Investments held within Isas are free from both income tax and capital gains tax. The Isa limit has increased to £20,000 a year per person from this year, so individuals can invest up to £20,000 before the end of the tax year and a further £20,000 on April 6 2018. This way they can avoid the worst excesses of the new tax regime. Jason Hollands, of Tilney, the financial planning company, said: “It’s really important, if you are in a position to do so, to move shares or equity funds into tax free wrappers, such as Isas and pensions, ideally doing so without exceeding your annual capital gains allowances.”

This process, known as “bed and Isa” or “bed and Sipp” involves selling shares or funds and then buying them back in a more taxefficient environment. However, doing this will mean that investors will capitalise any gains they have made, potentially making them liable for capital gains tax.

Individuals can make £11,300 of gains in a tax year per person before they are liable for capital gains tax. After that, CGT is currently 10pc for basicrate taxpayers and 20pc for higher rate payers. In general, those assets paying the highest regular income should be the first to “bed and Isa”. However any investments with large capital gains should be put within an Isa at the earliest opportunity.

Individuals who are married or in a civil partnership can potentially benefit another way. If they have a spouse with lower earnings, and so a lower tax band, or who has less in savings and investment income, they can also make “inter-spouse transfers”.

“Inter-spouse transfers of assets are easy and cost free, and do not trigger crystallisation of gains,” said Mr Hollands. This means they are not liable for CGT. “Once this has happened, the spouse can then sell the shares against their personal allowance for tax free gains,” said Mr Hollands.

However, he warned that transferring shares or funds to a spouse means they are the legal owner, and the transfer cannot be recalled.