Earlier changes to tax allowances
In fact, these latest changes only intensify a long-standing trend of reducing allowances and increasing the tax load for savers…
- CGT Annual Exempt Amount – CGT is only paid on overall gains above a tax-free allowance (the Annual Exempt Amount). However, this allowance has been cut significantly in recent years:
| CGT Annual Exempt Amount | |||
| Tax Year | 2022/23 | 2023/24 | 2024/25 |
| Amount | £12,300 | £6,000 | £3,000 |
- Dividend Allowance – The tax-free allowance on dividends received was also cut significantly in recent years:
| Dividend Allowance | ||||
| Tax Year | 2017/18 | 2018/19 | 2023/24 | 2024/25 |
| Amount | £5,000 | £2,000 | £1,000 | £500 |
- Tax rate on dividends – The dividend allowance was only introduced due to the scrapping of the notional 10% basic rate tax credit, which increased the taxation on UK dividends in April 2016. All rates of tax on dividend income suffered further increases of 1.25% from 6 April 2022:
| Dividend Tax Rates | |||
| Tax Year | 2015/16 | 2016/17 | 2022/23 |
| Basic Rate | 0% | 7.50% | 8.75% |
| Higher Rate | 25% | 32.50% | 33.75% |
| Additional Rate | 30.60% | 38.10% | 39.35% |
- Pensions – On 6 April 2010, an annual allowance of £255,000 enabled sizeable pension contributions, whilst a lifetime allowance of £1.8m allowed for a 25% tax free cash entitlement of up to £450,000 to be amassed, all accessible from age 50.
Today, the annual allowance for contributions is now £60,000 (with further reductions for high earners and those who have accessed benefits). Maximum tax-free cash is limited to the new £268,275 ‘Lump Sum Allowance’ (with little reason to anticipate this increasing) and the minimum pension age is 55 (increasing to 57 in 2028). - Inflation – Following the cost of living crisis, many people are acutely aware that the value of money decreases over time. Successive governments have increasingly failed to account for this, freezing tax allowances available to savers as a way of raising revenue, thereby reducing their value over time.
Furthermore, the past removal of indexation relief means tax is payable on notional gains, even where inflation has reduced the value of an asset in real terms.
A ray of light
The continual tax increases and changes to the savings landscape has made it difficult for people to save and plan over the long-term. The recent budget changes have now thrown many savers’ existing plans into disarray, and they will be looking for advice on what they should do next.
One area of savings consistently left untouched by successive governments may offer a solution. This is the chargeable event tax regime, applicable to investment bonds.
The benefits of bonds
Bonds address many of the concerns that are currently affecting savers. Bonds are not subject to CGT or dividend taxation. In addition, although chargeable gains do not benefit from indexation relief, top-slicing relief reduces the taxation on long-term gains, which may partly off-set the effects of inflation over time.
Taxes on death in the UK are already amongst the highest in the world and are now set to increase further. In this respect, bonds are particularly suited to estate planning, as they work exceptionally well with trusts (for example, with loan trusts, discounted gift trusts and discretionary trusts).
Even where trusts aren’t used, bonds can provide a useful way to gift investments at a time of the owners choosing. This is because bonds can be assigned to another party (family members as well as trusts) without creating a capital gain or immediate tax charge. The recipient will then benefit from any unused 5% tax-deferred withdrawal allowance and full top-slicing relief, as if they had held the bond since inception.
The use of assignments on a bond can also allow the tax allowances of other family members to be utilised on encashment. This can partially offset the impact of the various freezes and cuts to allowances implemented in recent years.
Comment
Recent tax rises are expected to result in a surge in demand for advice from individuals looking to reduce the impact on their savings. The increases to CGT and IHT mean that advisers will increasingly look to bonds and trusts as a solution for their clients.
Although nothing can be guaranteed, investors can take comfort from the fact that the chargeable event legislation has remained relatively untouched by successive governments for many years.
Important information
Please note this is for general information only and is based on LV's understanding of the relevant legislation and regulations and may be subject to change.
The tax treatment of benefits depends on individual circumstances, and may be subject to change in the future.
The use of this document is at your own risk, and the content should not be used for the provision of professional advice.
LV= accept no liability for any damages, losses or causes of action of any nature arising from your use of this document.