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George's dividend reform is a pain for business owners

By Jeremy Stewart

Published 04/08/2015

Investors would not be overly enamoured with George Osborne’s Budget statemen
Investors would not be overly enamoured with George Osborne’s Budget statemen

It was good to see last week that, in spite of recent uncertainty and volatility in markets, the early signs were that UK growth rebounded in quarter 2 to 0.7%, up from 0.4% in quarter 1, exceeding pre-crisis levels.

The main contributor to growth continues to be the service sector, representing 78.4% of GDP. Domestic demand is likely to support further expansion in the economy.

In addition to the more positive economic news, the UK market received some respite from recent external events. There were a number of corporate earnings reports and deals that pushed the market higher towards the end of last week.

Merger activity or corporate restructuring in Royal Dutch Shell, AstraZeneca, HellermannTyton and InterContinental Hotels Group plc all contributed to a FTSE 100 rally. This was also supported by companies such as Rolls-Royce Holdings plc and Smith & Nephew plc coming in with better than expected earnings results.

The market has also been reassured by recent statements from companies such as Royal Dutch Shell about dividend commitments and share buybacks.

The more 'normal' news of merger and acquisition activity and corporate earnings pushed aside some of the concerns about China and Greece.

I would love to be able to continue on a universally positive note. However, for some investors and business owners, George Osborne quietly placed a fly in the ointment in his summer Budget statement, earlier this month. Having said that, for many investors the Budget changes are positive.

If your investments are less than approximately £130,000 and if you don't take dividends out of your business you can look forward to a new tax-free annual dividend allowance of £5,000. Amounts received in excess of the allowance will be taxed based on your personal tax bracket, at a higher rate than at present.

For a measure that is expected to raise in excess of £6bn in tax receipts over the period of this parliament, there must also be losers.

In addition to those who have significant investments, the main impact will be on business owners. Many business people take income from their business by way of dividends and unfortunately these payments will be caught within the new rules.

If you usually take dividends from your business, I would recommend that you consider your position with your tax adviser well before implementation of the change in April 2016. When changes such as this have been announced in the past, many companies have responded by accelerating the payment of dividends to beat the deadline, so the next nine months could see a flurry of activity on the company dividend front.

Turning to the rest of this week, the most important market event in the UK is the August Monetary Policy Committee (MPC) meeting. Most expect the MPC to vote in favour of keeping the Bank Rate and stock of purchased assets unchanged, but that said, some now expect the MPC members to be divided. An interesting prospect.

Jeremy Stewart is head of wealth management and private banking at Danske Bank

Belfast Telegraph

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