Investing may be an effective way to grow your wealth for the future and achieve your financial goals. However, you may need to consider the taxes you are likely to pay.
If your investments are not tax-efficient, you may face a large tax bill and this could dampen your profits. This could be more likely in 2024 as changes to the Dividend Tax and Capital Gains Tax (CGT) regimes may affect you.
Fortunately, there are several ways to potentially mitigate tax on your investments, including a strategy known as “bed and ISA” – selling investments and purchasing them again through a Stocks and Shares ISA.
Read on to learn why you might pay more tax on your investments in 2024 and how a bed and ISA strategy could help prevent this.
The Dividend Allowance and Capital Gains Tax Annual Exempt Amount will change on 6 April 2024
Dividend Tax and CGT are two of the main taxes you might pay on your investments.
If you hold stocks and shares, you may receive dividends – a portion of the company’s profits paid to shareholders. Any dividend income within your Personal Allowance (£12,570 in the 2023/24 tax year) is not taxed.
You also have a “Dividend Allowance” of £1,000 in 2023/24. Any dividend income from non-ISA investments that exceeds this may be taxed according to your marginal rate of Income Tax. You could pay:
- 8.75% if you are a basic-rate taxpayer
- 33.75% if you are a higher-rate taxpayer
- 39.35% if you are an additional rate taxpayer.
Unfortunately, in his 2022 Autumn Statement, chancellor Jeremy Hunt announced that the Dividend Allowance would fall to £1,000 on 6 April 2023 and then again to £500 on 6 April 2024. This could mean that more of your dividend income from non-ISA investments could be taxed in the future.
You may also pay CGT on gains when selling or transferring ownership of certain investments. In the 2023/24 tax year, you can generate profits of £6,000 without triggering a tax charge. This is your “Annual Exempt Amount”.
You will likely pay tax on any gains above this threshold. In 2023/24, you could pay:
- 10% if you are a basic-rate taxpayer (18% on a property that isn’t your main home)
- 20% if you are a higher- or additional-rate taxpayer (28% on a property that isn’t your main home).
The chancellor also announced changes to CGT in the 2022 Autumn Statement – the Annual Exempt Amount fell to £6,000 on 6 April 2023 and will fall again to £3,000 on 6 April 2024.
As a result, you may pay more CGT when selling or transferring ownership of non-ISA investments in the future.
Fortunately, there are several ways to potentially mitigate these taxes on your investments. Using an ISA is often one of the most effective ways to do this.
You don’t normally pay Dividend Tax or Capital Gains Tax on investments in an ISA
Investing through a Stocks and Shares ISA may be attractive because it is very tax-efficient.
Normally, you don’t pay any Dividend Tax on dividend income from stocks and shares held in an ISA. You can also buy and sell investments in your Stocks and Shares ISA without triggering a CGT charge.
You can purchase many kinds of investments through a Stocks and Shares ISA including:
- Individual stocks and shares
- Unit trusts
- Investment trusts
- Exchange-Traded Funds
- Corporate and government bonds.
In the 2023/24 tax year, you can contribute up to £20,000 across all your ISAs. It may be useful to use this full “ISA allowance” before investing elsewhere if you want to mitigate tax – especially because the ISA allowance will reset on 6 April, and you’ll lose any remaining allowance you haven’t used from 2023/24.
However, you might already hold investments outside an ISA, which might attract more tax in the future because of changes to tax rules.
Luckily, you might be able to move those investments into the ISA tax wrapper and potentially reduce your tax bill.
You could reduce tax if you “bed and ISA” your investments
If you are concerned about paying more Dividend Tax and CGT in the future, you could “bed and ISA” your investments.
This involves selling your non-ISA investments, or “bedding” them, and then buying back the same investments through a Stocks and Shares ISA. Now that they are in an ISA, they no longer attract Dividend Tax or CGT, so you could save money on your tax bill in the future.
However, there are some potential complications you may need to consider before you decide to do this.
If the value of your investments has increased when you bed them, CGT may be payable on your gains. This may not affect you if you have enough Annual Exempt Amount left. However, you may need to consider the CGT you’ll pay when moving your investments into an ISA and whether it is the most tax-efficient option.
Additionally, you may need to consider how much of your ISA allowance you have left. For example, you may have used a significant amount of your allowance already by investing in a Stocks and Shares ISA or contributing to a Cash ISA. As a result, you may not be able to buy back all your investments without exceeding your ISA allowance and triggering a tax charge.
There is also a chance that the value of your investments could change between bedding them and purchasing them again in an ISA. If the value goes up, it could cost you more to purchase the same number of units.
Bed and ISA can be an effective way to move investments into a tax wrapper and potentially reduce tax in the future. That said, it may be useful to seek professional advice to ensure that you are being as tax-efficient as possible.
Get in touch
We can help you find ways to potentially mitigate the tax you pay on your investments.
Please contact us at hello@ardentuk.com or call 01904 655 330. As an award-winning financial advice company that was a 2022 VouchedFor Top Rated firm, you can be sure that we’re a bona fide company providing excellent advice and high-quality service.
Please note
This article is for general information only and does not constitute advice. The information is aimed at retail clients only.
Please do not act based on anything you might read in this article. All contents are based on our understanding of HMRC legislation, which is subject to change.
The value of your investments (and any income from them) can go down as well as up and you may not get back the full amount you invested. Past performance is not a reliable indicator of future performance.
Investments should be considered over the longer term and should fit in with your overall attitude to risk and financial circumstances.
