Your last-minute plan to beat the wealth tax raid

Tax year end is looming but there is still time to protect your investments from the taxman’s impending wealth tax raid. From 6 April the tax-free allowances on both dividends and capital gains will be slashed, meaning investors will pay hundreds of pounds more in tax. But there’s still time to stuff your ISA or pension, move your assets to your spouse and maximise this year’s allowances before the deadline hits.

The move to cut the tax-free dividend allowance in half from £2,000 to £1,000 from 6 April will drag many more people into paying the tax, while the further cut to £500 in 2024 will cast the tax net even wider. The cut will mean that from 2024 an additional rate taxpayer who has more than £2,000 of dividends at the moment will pay £590 more in tax, while a basic-rate taxpayer will face an extra £131 on their tax bill.

The capital gains tax-free allowance is being cut too, from the current £12,300 to £6,000 from 6 April and £3,000 from April next year. The government itself estimates that the move to cut the tax-free allowance over the next two years means around a quarter of million more people will have to pay the tax – which means filling out a tax return. By April 2024 the cuts will mean a higher-rate taxpayer will pay £1,860 more tax on their investments, assuming they realise gains up to the current £12,300 limit, while a basic-rate taxpayer will be hit with £930 more on their tax bill.

In anticipation of the coming tax raid, we’ve already seen a jump in the number of customers using ‘Bed & ISA’ transactions to utilise the more generous tax allowance this year and put assets in their ISA, out of the Chancellor’s clutches.

Use up your allowances

If you’re sitting on large capital gains outside an ISA or pension you can use up your tax-free allowance of £12,300 this year before it’s slashed to £6,000. If you sell investments to realise gains up to this level you won’t pay any tax on the money. You just need to check what gains you’ve already realised this tax year, across all your investments, and make sure you don’t exceed the tax-free limit.

If you realised that same amount of gains from investments from 6 April onwards you’ll face an extra tax bill of £1,260 for a higher-rate taxpayer, or £630 for a basic-rate taxpayer. And if you factor in April 2024’s changes, when the CGT allowance will halve again to just £3,000, those figures rise to £1,860 and £930 respectively.

Fill your ISA

If you have investments outside a tax wrapper the savviest move is to transfer that money into an ISA, or into a pension if you can afford to tuck it away for longer. You’ll need to check how much ISA allowance you have remaining this tax year to make sure you don’t go over the £20,000 annual limit. For those with income-yielding investments who are worried about the dividend allowance cut, it makes sense to prioritise the investments that pay the highest dividends first, to try to keep more of their income from the taxman’s clutches. If they move the highest income investments into their ISA this tax year, on 6 April they can move the next tranche across to cut next year’s tax bill.

For those sitting on large capital gains you can sell assets to realise a gain up to your remaining tax-free allowance and then buy it back within your ISA, which means you’ll make use of the tax-free allowance and protect any future gains from the taxman. You can use your platform’s Bed and ISA service, just make sure you check the deadline, which is usually a few working days before the tax year end*

*For AJ Bell customers the tax year end deadline is by 5pm on 31 March 2023.

Transfer money to your spouse

Any investments transferred to your spouse or civil partner are exempt from capital gains tax. This means that if your spouse hasn’t used up their tax-free allowance this year and has some ISA allowance remaining you can make use of those tax breaks. You just need to make sure you keep a note of the original cost of the asset, as that’s what will be used when your partner comes to sell it.

The same goes for income-producing investments: your spouse will also benefit from a £1,000 tax-free dividend allowance from 6 April, so you can move investments to them to maximise that tax break. If your spouse is in a lower income tax bracket to you there’s a double benefit, as they will pay either dividend or capital gains tax at a lower rate than you. That means even if they have used up their allowances, there could still be a benefit to shifting the assets to them.

Use your losses

While no investor wants to make a loss, losses can be your friend for capital gains tax purposes. Losses made in the current tax year can be offset against any gains before you deduct the tax-free allowance. If you don’t use them this year you can carry forward any losses for future tax years, to offset against any future gains. Just make sure you register the losses with HMRC within four years after the end of the tax year in which you made the sale in question.

Use your pension contributions to drop your income tax band

One particularly clever trick is to use your pension contributions to reduce your income tax band. When you contribute to your SIPP, the gross value of the contribution has the effect of extending your basic rate tax band. This means that the rates of capital gains and dividend tax you pay could be lower if it means you are no longer a higher-rate taxpayer. This is a particularly handy trick if you’ve only just tipped over into the next tax band, meaning a small pension contribution would bring you under the threshold. If you have used your full pension allowance this year or cannot make a pension contribution, you can also lower your taxable income by donating to charity. If you’re eligible, you can then also claim gift aid on the donation.

How much more tax you’ll pay: