How to protect your wealth from the Government’s incoming tax crackdown

Fears of higher levies on investments prompt savers to shield assets, writes Richard Evans

Act now. This is the advice to savers and investors who will pay more tax if, as feared, the Government makes the current dividend and capital gains tax regimes less generous.

No one must simply accept that they must pay HMRC more: there are numerous levers that well-prepared, diligent savers can pull to limit – or even eliminate – any increase to their tax bill.

We don’t know what exactly Jeremy Hunt, the Chancellor, has in mind but the possibilities include increases in the rates of dividend and capital gains taxes, reductions in the annual tax-free allowances or restrictions to the current exemptions. Here are some of the things you may be able to do to minimise the impact of any changes.

Dividend tax

Currently the first £2,000 of any dividend income is tax free. After that you pay tax at 8.75pc, 33.75pc or 39.35pc, according to whether you pay the basic, higher or additional rate of income tax.

The most obvious way to shelter your dividends from tax is to hold the shares concerned in an Isa or pension. Combined, you can invest £60,000 a year into these two vehicles. Using your spouse’s allowances is also an option.

However, most serious savers will have used these allowances if available and will invest outside tax shelters, and pay dividend tax, only if they have to. What options are there for these people?

One is venture capital trusts. VCTs are a special type of investment fund and, among other tax perks, the dividends they pay are tax free. You can invest up to £200,000 a year before you lose the tax break. This largesse on the part of the Treasury is because VCTs can invest only in riskier businesses, so be sure you are comfortable with the actual investments in the fund before you commit your money.

Another option is to switch some of your money to a different kind of income-producing investment, such as bonds. The income from bonds is treated as interest, not dividends, and there is a separate annual allowance called the personal savings allowance for interest on savings accounts or bonds. The allowance is £1,000, £500 or zero for basicrate, higher-rate and additional-rate taxpayers respectively.

You could also switch to shares or funds focused on capital growth and sell a portion of them each year to generate income. This could give rise to a capital gains tax liability but, at least as things stand, the annual tax-free allowance for CGT, £12,300, is much higher than the dividend allowance or personal savings allowance. This approach can be more risky, however: you will have to sell more stocks or fund units to generate a given sum when markets are depressed, a consideration that does not apply to dividend payments.

None of the above suggestions is much help to those whose dividends come from shares in their own business as opposed to shares quoted on the stock market.

You cannot, for example, put the shares in the limited company through which you own a corner shop or some buy-to-lets into an Isa or pension. Here your best option is probably to transfer shares to a spouse in order to use his or her’s dividend allowance.

As the dividends are under your control you can also limit them in a good year to the amount of the allowance, or at least to the threshold of a higher tax band. The money held back could be used later to support a bigger dividend in a leaner year for the business.

All gold, silver and platinum coins made by the Royal Mint are free of CGT

VCTs are a special type of fund and one perk is that the dividends they pay are tax free

Capital gains tax

Again, the first step is to use your Isa and pension allowances for those investments that qualify. Transfers between spouses are another option. You also have control over when you sell assets, so you should be able to even out your sales so as to make the most of the taxfree allowance in successive years.

Let’s say you want to sell £20,000 worth of shares held outside an Isa or pension. By splitting the sale into two, and delaying the second £10,000 sale until the next tax year, you could avoid a CGT bill entirely thanks to the annual £12,300 allowance.

Certain assets are entirely free of CGT. One example, much in the news of late, is bonds issued by the Government and commonly known as gilts.

After recent falls in their price these bonds now have yields comparable with those on best-buy savings accounts. The difference is that, if you choose a gilt that is trading below the price at which it was issued, almost all of your return can come in the form of capital gains – which are tax free on gilts.

Coins held as investments are also free of CGT, as long as they are legal tender. “All gold, silver and platinum bullion coins produced by the Royal Mint are classed as CGT-free investments; this includes gold and silver Britannia coins, sovereigns and popular Queen’s Beasts range,” the Mint said on its website.

When it comes to buy-to-let investors, the options are limited. Those who own a portfolio of say 10 or more properties and run it on a professional basis may be able to at least defer CGT bills and run the business more flexibly if they form a limited company, said Chris Etherington of RSM, the accountancy firm.

“Thanks to what is called ‘incorporation relief ’, there could be no tax to pay when you transfer the properties from your own name into the company if it represents a business you plan to continue,” he said. “You will still face CGT when you eventually sell your shares in the limited company but in the meantime the gains on any properties you sell within the portfolio will be reduced and subject to corporation tax, which is lower than CGT. This will allow you to run the portfolio more flexibly.”