Do you now have to sell part of your investments?
I’m not asking because of the unknown magnitude of a banking crisis, the potential for a recession, or the vagaries of what might happen to the stock market.
Instead, it’s due to something we know will definitely happen in two weeks: Jeremy Hunt’s tax attack on investment profits and dividends.
If you hold investments outside of an Isa – especially if you have a long-term pot on them or have made significant profits – you should consider selling now before the tax-free allowance for higher capital gains runs out.
A tax attack is coming and if you have investments outside an Isa to sell and buy them back within the tax shelter via a Bed and Isa can pay off
On April 6, when the new tax year begins, the annual tax-free capital gains allowance will be reduced from £12,300 to £6,000.
On the same day, the annual tax-free dividend payment will be halved from £2,000 to £1,000.
And there’s more bad news: a year later, the CGT fee drops to just £3,000 and the dividend payment becomes a mere £500.
Announced in the November fall statement, this was one of the Chancellor’s balancing measures following Kwasi Kwarteng’s disastrous mini-budget, and represents the biggest assault on everyday investors we’ve seen in many years.
All small investors who hoped in last week’s budget for a postponement of the spectacular hacking of capital gains tax and dividend tax were disappointed.
But there is a way to protect yourself from the more stingy future for CBT and dividends: get as much as you can into an Isa.
Within the tax-exempt envelope of an Isa share, there is no capital gains tax to pay on profits or dividend tax to pay on payouts. And as a bonus, there’s no need to fill out details of either on a tax return, either.
Therefore, investing in an Isa makes sense and can be much more profitable than keeping your investments out of an Isa, as profits can grow over the years without being eroded by tax.
The easy way to get your existing investments into this tax shelter is through something known as a Bed & Isa where you sell your shares, funds, investment funds etc and then buy them back directly within an Isa.
The IRS is perfectly fine with you doing this and a Bed and Isa is a feature offered by most investment platforms, many of which can do pretty much all the work for you.
Those I’ve spoken to on investment platforms in recent weeks tell me there has been a flurry of requests from Bed and Isa.
That’s not surprising as this is a potentially doubly profitable business this year.
Not only do you benefit from the future tax protection of holding investments in an Isa, but you also use up some of this year’s higher capital gains tax deductions.
As I noted above, this is especially important for those who have built up investment pots over the years outside of an Isa, or who have made significant short-term profits.
They are most at risk of being caught out with lower capital gains tax deductions and of having built up healthy levels of annual dividend income.
Any profit in excess of the annual CGT deduction is taxed at 10 percent for base rate taxpayers and 20 percent for higher rate taxpayers.
Currently, a higher rate taxpayer earning £15,000 in capital gains in a year would pay tax on just £2,700 of that gain, leaving them with a £540 bill.
But if they made the same profit after April 6, 2023, they would be liable to tax on £9,000 of their profits, which equates to a tax bill more than three times as much as £1,800.
By selling your investments, you’re doing something known as crystallizing your profits — which triggers a capital gains tax.
What you can’t do is just sell some investments and then buy them right back outside of an Isa. The tax authorities are wise to this and impose a 30-day rule to stop this.
But selling and buying back investments in an Isa is perfectly legitimate, hence the Bed and Isa system.
If you have investments outside of an Isa and own shares of Isa with the same investment platform, this should be a simple process, but if they are held in different places, you’ll have to do the legwork yourself.
The other benefit of a Bed & Isa is that it helps use up some of this year’s £20,000 Isa allowance, something most of us couldn’t do with new money.
But you do have to put on your skates. The process takes time and there is only two weeks until the end of the tax year. Don’t leave this until the last minute.
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