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Where Taxpayers and Advisers Meet

Treatment of dividends in CGT calc

trainline
Posts:5
Joined:Sat Oct 02, 2021 4:25 pm
Treatment of dividends in CGT calc

Postby trainline » Sat Oct 02, 2021 4:35 pm

Hi,
Looking ahead to a future sale of a residential property which will give rise to CGT.
My wife and I are usually basic rate taxpayers. I have pension income and dividend income. My wife currently has dividend income only.
Will the dividend income be included as 'taxable income' in the CGT calc and therefore, with the taxable gain, potentially push us into higher rate tax? The HMRC website is a bit vague on this.
Thanks

Lambs
Posts:1571
Joined:Wed Aug 06, 2008 3:15 pm

Re: Treatment of dividends in CGT calc

Postby Lambs » Sun Oct 03, 2021 6:21 am

T,

Yes, for the purposes of your CGT calculations, your respective gains will "sit" on top of your incomes, so that whatever then falls above the Higher Rate Threshold will be taxable at 28%, as residential CGT. To put it another way, dividends "count" to reduce the amount of Basic Rate Band left over against CGT.

You can extend the Basic Rate band by pension contributions or Gift Aid, so that less is taxed at 28% and more at 18%.

Hope this helps,

Lambs

trainline
Posts:5
Joined:Sat Oct 02, 2021 4:25 pm

Re: Treatment of dividends in CGT calc

Postby trainline » Sun Oct 03, 2021 12:13 pm

Thanks Lambs that confirms what I thought would be the case.

robbob
Posts:3152
Joined:Wed Aug 06, 2008 4:01 pm

Re: Treatment of dividends in CGT calc

Postby robbob » Mon Oct 04, 2021 8:38 am

You can extend the Basic Rate band by pension contributions , so that less is taxed at 28% and more at 18%.
Just a minor warning in this regard - pension contributions on which you can claim tax relief are limited to 3600 or 100% of relevant uk earnings which normally only include "earned income" - residential property income - capital gains - dividend income and pension income would all not count here so options to add to pension and avoid the higher rate tax may be somewhat limited if you have no earned income.

https://www.gov.uk/hmrc-internal-manuals/pensions-tax-manual/ptm044100#earnings

Lambs
Posts:1571
Joined:Wed Aug 06, 2008 3:15 pm

Re: Treatment of dividends in CGT calc

Postby Lambs » Mon Oct 04, 2021 12:27 pm

P,

Good point.

I should add that there is also a maximum age above which no pension contribution will rank for tax relief. There is no tax relief on pension contributions made by a taxpayer over the age of 75 (FA 2004, s 188(3)(a))

Regards,

Lambs

trainline
Posts:5
Joined:Sat Oct 02, 2021 4:25 pm

Re: Treatment of dividends in CGT calc

Postby trainline » Mon Oct 04, 2021 1:54 pm

Thank you both.

trainline
Posts:5
Joined:Sat Oct 02, 2021 4:25 pm

Re: Treatment of dividends in CGT calc

Postby trainline » Mon Oct 04, 2021 4:32 pm

One related question please...does gift aid and the allowed 3600 pension contribution still extend the basic rate tax band if the only 'income' is the capital gain (no other income or dividends)?

Lambs
Posts:1571
Joined:Wed Aug 06, 2008 3:15 pm

Re: Treatment of dividends in CGT calc

Postby Lambs » Tue Oct 05, 2021 2:55 am

T,

Yes, I think they do. However, not only are pension contributions constrained to no more than £3,600pa gross in the absence of earnings (or if one is "too old"), but you must also be careful with Gift Aid if you have not paid sufficient tax in the year to cover any relief claimed by the relevant charity. Simply put, HMRC will not allow itself to be "out of pocket" in relation to any amounts claimed by the charity from your Gift Aid donations, and could come knocking on your door for any difference.

Having said that, I know HMRC will allow your Capital Gains Tax bill to cover any such tax relief, e.g., at

https://www.gov.uk/government/publications/charities-detailed-guidance-notes/chapter-3-gift-aid#chapter-35-tax-to-cover

it says:

3.5.1 Donors must be charged an amount of Income Tax and/or Capital Gains Tax, whether at the basic rate or some other rate, for the tax year in which Gift Aid donations are made at least equal to the Income Tax treated as deducted from the total of all their Gift Aid donations made in the same tax year. Donors who have not been charged sufficient tax to cover the Income Tax deducted from their Gift Aid donations are responsible for pay any difference.

I trust this is useful,

Lambs

trainline
Posts:5
Joined:Sat Oct 02, 2021 4:25 pm

Re: Treatment of dividends in CGT calc

Postby trainline » Mon Oct 18, 2021 8:52 am

Thank you Lambs that clarifies it perfectly.

Regards
T


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