How business owners can minimise tax on capital gains and dividends

Reductions in tax-free allowances for capital gains tax (CGT) and dividends will take effect in April, with the change throwing a potential curveball at business owners. These allowances have provided a buffer zone, reducing the administrative burden of tax returns for smaller portfolios and encouraging further investment. Now, with the thresholds halved, business owners need to adjust their strategies to ensure tax efficiency.‍

The shrinking dividend allowance‍

The tax-free dividend allowance has been particularly helpful for small investors, retirees, and those with limited incomes. It essentially allowed them to receive a certain amount of dividend income without exposure to taxation. However, the reduction in this allowance to just £500 means that some who previously fell under the threshold might now find themselves liable for the 8.75% basic-rate level of tax (although this rate changes depending on other taxes owed).

Strategies for Managing Dividends:

• Harnessing tax-efficient accounts: Investment ISAs can offer a haven for dividend income. Dividends deposited within an ISA are completely tax-free, making them ideal for long-term investments, but not so good if immediate cash is required.
• Dividend Reinvestment Plans (DRIPs): Not all businesses offer DRIPs, but it could prove to be a useful mechanism to reduce tax liabilities. This strategy means dividends will automatically be reinvested into additional shares, potentially increasing future returns without incurring immediate tax liabilities.
• Timing your dividends: While not everyone has complete control over when companies pay dividends, staggering investments across different companies can help spread out dividend income throughout the year, potentially ensuring returns remain below the new threshold.
  

Those who own Limited Companies are more likely to exceed the dividend allowance. However, strategic planning can potentially help mitigate tax burdens. This is where a holistic approach to profit extraction comes into play.

Limited companies and dividend extraction:

• Salary vs. dividend extraction: A balance needs to be struck between drawing a salary (subject to income tax and National Insurance) and extracting profits as dividends. Consulting a tax advisor can help determine the optimal mix for specific circumstances.
• Pension contributions: Increasing pension contributions reduces a company's taxable profits, which then minimises overall tax liability.
  

Optimising disposals for capital gains tax

The reduction in CGT allowance from £6,000 to £3,000 in April means careful consideration is needed when disposing of assets.

Here are some strategies that could help minimise a CGT bill:

• Utilise the annual exemption: Before the April deadline, make smaller disposals to utilise your annual £6,000 CGT exemption.
• Spousal transfers: Consider transferring assets between spouses to maximise the combined CGT allowance.
• Portfolio management: A financial planner will be able to identify assets that have reached their peak value and can be disposed of with minimal tax implications. They can also advise on reliefs such as Business Asset Disposal Relief (BADR) for qualifying assets.
  

The importance of tax returns

While the tax-free allowances mean that some do not need to either file, or declare gains, or dividend income, in a tax return, it’s important to be clear on whether you require a tax return or not. Failing to file a return when necessary, or supplying inaccurate information, can result in hefty fines from HMRC so a tax advisor should be consulted.

In Summary

The reduction in tax-free allowances presents challenges for business owners. However, adopting a strategic approach to managing dividends, extracting profits, and disposing of assets, means tax burdens can be minimised. Consulting with a qualified financial advisor can help you develop a personalised plan that maximises profitability and minimises tax liabilities.

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