CGT bands and dividend allowance

Does the dividend nil rate absorb the first £5k for CGT purposes?

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A client has dividend income in 2016-17 of £5k.  They have no other income.  They do however have non-residential property gains of £130k in 2016-17.

I read in the HMRC dividend allowance guidance notes that 'divdends within your (dividend) allowance still count towards your basic or higher rate bands', which, as I think we all agree, means that your £5k dividend nil rate band/allowance sits within the basic rate band.  There is also an example in the same guidance, at point 2.3 where the non-dividend income is £6.5k and dividends are £12k.  The example states that the personal allowance is used to cover the non-dividend income leaving £4.5k of personal allowance to set against the dividends, in addition to the £5k dividend allowance, leaving £2.5k as taxable dividends at 7.5%.  All good up to this point.

So, in my situation, I'll be using £5k of personal allowance to cover the dividend income - fine - and they'll lose the balance, but, do I have £32k of my basic rate band to set against the gains at 10% and the balance at 20%, OR, do I only have £27k of my basic rate band available?

In my mind, the first situation seems reasonable, as there have been no dividends chargeable to tax to utilise any of my basic rate band, whether the first £5k or any part of it, but this does only relate to income tax, not CGT.  Simon's tells me the rate of tax are 10% and 20% depending on the level of my taxable income and directs me to various sub sections of s.4 TCGA 1992, but these don't seem to define how the basic rate band is affected by dividends that are within this scenario.

Perhaps I'm reading too much into this, and I should simply be looking for the taxable income (which in this case is nil) that should be deducted from the basic rate band.  Following this logic, the personal allowance renders the dividend not taxable income, so I have my £32k of BRB available.  Taking this a step further and increasing dividends, this definition does work i.e. if my dividends were £20k, I'd be deducting £11k for personal allowances and £5k for the dividend nil rate leaving £4k as taxable at 7.5%, with my basic rate used being £9k - the total taxable income, albeit that the first £5k is taxable at 0%.

Has anyone else come up against this situation?  Can anyone point me to the particular section in the legislation that confirms the position? 

Replies (5)

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By Dick Stastey
22nd Feb 2017 17:37

We do not all agree that the £5K allowance sits within the basic rate band. If an individual has a £51K salary and £20K dividends, then £32K of the salary is charged to tax at 20%, with the other £8K being taxed at 40%. Then £5K of dividends are taxed (within the HRB) at 0% and the rest are taxed at 32.5%.

Dividends within the personal allowance do not use up any of the £5K.

Your residential property gains will be taxed £32K at 18%, and £86.9K at 28%.

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Replying to Dick Stastey:
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By Accountant A
22nd Feb 2017 18:12

Dick Stastey wrote:

We do not all agree that the £5K allowance sits within the basic rate band. If an individual has a £51K salary and £20K dividends, then £32K of the salary is charged to tax at 20%, with the other £8K being taxed at 40%. Then £5K of dividends are taxed (within the HRB) at 0% and the rest are taxed at 32.5%.

Dividends within the personal allowance do not use up any of the £5K.

Your residential property gains will be taxed £32K at 18%, and £86.9K at 28%.

This tax simplification is working like a charm!

OP said non-residential so presumably enjoys the lower CGT rates.

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Replying to Accountant A:
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By Dick Stastey
23rd Feb 2017 10:48

Agreed.

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By ianthetaxman
23rd Feb 2017 12:02

Couple of things - I should perhaps have clarified a couple of points.

Firstly, the CGT is on the sale of shares i.e. not residential property, so CGT will be at 10%/20%.

Secondly, I'm aware that the £5k floats into the 40%/45% bands as income etc. increases - I simply made the point about the £5k being within the BRB or other bands as this was an issue that was debated considerably when first announced.

I'm still of the opinion that the dividend in my situation isn't treated as taxable income due to personal allowances, and therefore doesn't impact on the BRB for CGT purposes.

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