A new wave of taxation changes loom on the horizon for 2023 including significant cuts to the allowances available for capital gains and dividend income (to be introduced in April). The cuts to these allowances will have a significant impact for individuals holding multiple mid-range properties or modest wealth portfolios, as well as deceased’s estates, that would often experience projected capital gains within the current allowance available of £12,300 for each tax year.
Further, there will be a significant reduction to the additional-rate income tax threshold, dropping from £150,000 to £125,140 from 6 April 2023. Which? have estimated around 250,000 taxpayers will be pushed into this higher tax band, paying 45% tax on any income above the new limit.
It has been predicted that we may see the government profiting quickly through these future procedures. For instance, the Financial Times have highlighted that the reduction to the dividend allowance alone could raise £455mn for the treasury.
The key areas to note for 2023 are set out below:
- Inheritance Tax (IHT) and Residence Nil Rate Band (RNRB) thresholds frozen at current levels until April 2028. Accordingly, £325,000 frozen as the available nil rate band for IHT purposes and £175,000 for RNRB, with transferable nil rate band rates remaining in place also.
- Capital Gains Tax (CGT) annual allowance to be cut from £12,300 to £6,000 from April 2023 and then reduced further to £3,000 from April 2024.
- Income Tax and National Insurance frozen at current rates until April 2028 for those earning under £125,400 a year.
- Plans to halve the dividend allowance to £1,000 from April 2023 and then to £500 from April 2024.
- 45% rate of Income Tax to apply to those earning £125,400 or above (threshold reduced from current £150,000). This is not only a reversal of the Growth Plan measures but an extension of the old rules, meaning that a larger proportion of high earners will be caught by the higher rate of Income Tax. If you consider the impact of inflation and incremental salary increases, this could affect a significant number of individuals who would have ordinarily fallen into the lower rate tax bracket.
What does this mean for individuals?
- Commentary suggests that individuals may elect to transfer their holdings or delay sales altogether to avoid paying CGT more regularly.
- We may also see an initial increase in the sales of second homes, rentals, or wealth portfolios in a bid by individuals to beat the implementation of the CGT allowance cuts.
What does this mean for estate administration?
- Beneficiaries may decide to have wealth portfolios and properties transferred to them, as opposed to selling. However, this is much less likely when three or more beneficiaries are inheriting the estate, unless all beneficiaries agree.
- When personal representatives (PRs) sell a property or shareholding within each estate, they should consider whether it may be beneficial to “appropriate” the property to all the beneficiaries prior to the sale. If PRs appropriate the property to a beneficiary, the property is essentially transferred out of the estate to the beneficiary notionally and sold on their behalf. This would enable each beneficiary to use their personal CGT allowance, if available, against their share of the gain made on the sale.
- We may see an increase in beneficiaries choosing to have their share appropriated to them, should they have sufficient CGT allowance available. However, this will depend on each beneficiary’s individual Income Tax and CGT circumstances, and we would always advise that beneficiaries seek their own financial advice.
- We are likely to see a significant increase in regular payments of CGT, and the submission of CGT returns, as part of the administration of deceased’s estates. Due to the reductions of the available allowance i.e., £6,000 from April this year and £3,000 from April 2024, anything above this will be subject to CGT at a rate of 28% on the net gain.
However, this is of course dependent on the strength of the financial markets generally i.e., if asset values do not actually increase significantly over the next five years, CGT may not be as much of a money maker for the government as currently anticipated.