2022 Autumn Statement presented to Parliament

In his 2022 Autumn Statement presented to Parliament, the Chancellor made two quick fire announcements impacting personal financial planning.

 “The dividend allowance will be cut from £2,000 to £1,000 next year and then to £500 from April 2024.”

“The Annual Exempt Amount for capital gains tax will be cut from £12,300 to £6,000 next year and then to £3,000 from April 2024.”

Also, in his 17 October Statement, Mr Hunt announced a cancellation of the 1.25% dividend tax cutting policy from April 2023. In other words, the 1.25% increase, which took effect in April 2022, now remains in place. This means

• Dividends in Basic rate 8.75%
• Dividends in Higher rate 33.75%
• Dividends in Additional rate 39.35%

For individuals investing in shares in Open Ended Investment Companies (OEICs), client reaction might very well be…

“Ouch!”

To understand the personal tax implications of an OEIC investment we need to consider both ‘internal’ fund tax and ‘external’ personal tax.

Internally, an OEIC is subject to 20% corporation tax on its taxable income (rate aligned to basic rate income tax). Thereafter, in each distribution period the OEIC must pay out all its distributable income – either interest or dividends. Interest can only be paid by a fund if interest type investments exceed 60% of all its investments. Failing that, the whole distribution will be a dividend.

If an OEIC distributes interest, that’s an allowable expense in its tax computation i.e. taxable interest received by the fund is offsetable against tax allowable interest distributed. If dividends are distributed, they’re not an allowable expense of course.

The result is a ‘light touch’ tax regime where investors are broadly in the same tax position as if they had invested directly in the underlying investment assets of the fund.

A distribution may be an income distribution, or for those with accumulation shares the distribution may be reinvested and added to capital; despite it not hitting the bank account it remains income for tax purposes.

An investor receiving dividends from an ‘equity’ fund will be potentially exposed to these higher dividend rates and a falling dividend allowance. In the current year, a portfolio of £66,667 yielding 3% exhausts the dividend allowance. By 2024/25 a portfolio of just £16,667 yielding 3% will exhaust it. And don’t forget that the reduction in the 45% tax threshold to £125,140 will exacerbate matters for some.

What about capital gains tax? Each separate sub-fund is regarded as an OEIC and therefore an exchange of shares in one sub-fund for those of another constitutes a disposal and reacquisition. The (shrinking) Annual Exempt Amount (AEA) is commonly used annually by planners to ‘bed and ISA’ an OEIC portfolio. With an AEA of £12,300, withdrawing £20,000 from an OEIC portfolio to fund a client’s ISA without triggering a tax charge is usually straightforward. When this reduces to £6,000 and then £3,000 more care will be required to avoid paying CGT on these disposals, especially for larger portfolios. Currently, a portfolio of £410,000 with growth of 3% exhausts the AEA. By 2024/25 a portfolio of just £100,000 with growth of 3% will exhaust the AEA. Not an issue for those holding single company multi asset funds which are rebalanced by the manager not the individual.

For clients concerned about the impact of the Autumn Budget on OEIC income and gains, remember that OEIC funds can be ‘wrapped’ inside a UK or international non income producing insurance bond to blend the client’s investments for maximum tax efficiency. Some may find it surprising that dividends can be rolled up gross inside both UK and international life funds. Bond investments enable clients to immediately turn off that income tap from a tax perspective and if required take tax deferred withdrawals of capital to supplement income. Gains are taxed under unique rules providing flexibility regarding when gains arise and who they are assessed against – but that’s a topic for another day.

In the meantime, it’s evident that the medium-term implications of the changes on personal finances may be more significant than first appear, and so it might be sensible for individuals to take advice to review their affairs to deliver the most efficient outcomes.

And finally, amid this tax analysis, it shouldn’t be forgotten that tax planning matters should guide but not dictate wrapper choice. For example, if the client is looking for an investment not allowable under the OEIC rules e.g. one where returns are ‘smoothed’, then a bond rather than an OEIC would be necessary.