Where are you in Maximising UK tax-free income

[WessexBoy]

Moderator Message:
Created topic to discuss a different topic but related to "Reality of Living off HYp dividends". Raptor.

Given that a number here do (or will) have alternative sources of income, such as pensions, I'd be interested in who is geared to use HYP to maximise UK tax-free income from Dividends (currently £5,000), and with what capital sum and by what spread of HYP shares.

(I might then opt to draw on cash savings to achieve that.)

[Raptor]

I have started to "Bed & ISA" shares from my trading account to my ISA to drop the dividends earned so as to "reduce" dividend tax. This will be an ongoing exercise. This year moved £19500 worth (I also "sold" shares as needed money for other purposes). I chose those paying the "largest" dividends, the idea being to do this every tax year until I am left with the "dregs", those that are not paying their way, maybe then I will sell them off and just put the money into the ISA or a savings account, depends on interest rates and my plans at the time (and the shares involved , of course).

With iWeb they only charge once for the move, £5, rather than 2 charges, you just ring them up and they do it over the phone, you will not get the same amount of shares(IMO) due to the spread between selling and buying, but for me it is worth it.

I currently have 15 shares in my trading account (out of a HYP portfolio of 20, so plenty of duplication). Currently looks like 2 or 3 years to get below £2K. Which should leave 10 shares (but who knows what the environment will be then). 46% of my shares by value are in my trading account.

Raptor.

[Grumpsimus]

I am in the fortunate position of having all my HYP in an ISA and my wife's HYP is also in an ISA. This would give us more than enough tax free income to live on. However, we both have pensions which cover our daily living requirements.

There is some further capital managed by a Financial Planner, which is taxable. We are drawing this down to meet major items of expenditure i.e. home improvements, holidays etc. This also reduces the amount of tax paid, which should be below the £5000 dividend limit for each of us this year.

I suspect that I am fairly usual around here, as I run the HYPs and the Financial Planner runs the SIPPs and other Capital. Our Financial Planner is very keen for us to use the whole of ISA allowance each year. It was probably the best financial decision I every made to start investing using ISAs.

[tjh290633]

Having been at this for a long time, virtually all my shares and funds are sheltered inside ISAs. Back in the days of PEPs, I gradually moved everything into them, using my entitlement each year, and carried on with my ISA, as and when cash became available. Some went into a PEP in my wife's name, when I had used my own entitlement.

You will recall that originally tax credits could be reclaimed in a PEP. At 25% this added one-third to the dividend income, which more than paid for the fees after the first couple of years. As this was all being reinvested, my IRR was over 13% at times. Now it is lower, 10-11% but obviously varying.

Keeping out of the higher rates of tax was and still is the main objective.

TJH

[ikethespike]

Raptor is starting to "bed and Isa" to reduce the effects of dividend tax - which seem to be a good strategy. However, my dilemma is that the costs incurred may outweigh the benefits, at least initially. For example, for a £20,000 transaction in Scottish American IT (SCAM); there is a spread of approximately 1.25% (cost = £250), plus stamp duty on re-purchase 0.5% (cost =£100), plus transaction fee, say £10, then total cost of sale = £360. The annual dividend is about 3%, that is £600 and therefore the tax payable for a basic rate tax payer is £45. I realise the savings are much more for a higher rate tax payer and cumulative year on year, for basic and higher rate individuals. The exchequer gains both ways - if I "bed and isa" by £100 or £45 by dividend tax. What do you think ?

[torata]

The exchequer gains both ways - if I "bed and isa" by £100 or £45 by dividend tax. What do you think ?

Although it's a one off loss by bed and breakfasting as opposed to a yearly loss.

torata

[Lootman]

Raptor is starting to "bed and Isa" to reduce the effects of dividend tax - which seem to be a good strategy. However, my dilemma is that the costs incurred may outweigh the benefits, at least initially. For example, for a £20,000 transaction in Scottish American IT (SCAM); there is a spread of approximately 1.25% (cost = £250), plus stamp duty on re-purchase 0.5% (cost =£100), plus transaction fee, say £10, then total cost of sale = £360. The annual dividend is about 3%, that is £600 and therefore the tax payable for a basic rate tax payer is £45. I realise the savings are much more for a higher rate tax payer and cumulative year on year, for basic and higher rate individuals. The exchequer gains both ways - if I "bed and isa" by £100 or £45 by dividend tax. What do you think ?

ETFs are very efficient vehicles to bed-and-ISA because there is no stamp duty, and because spreads are very thin for the main index ETFs. That 1.25% on the IT you cite is a pig and I believe some other ITs have tighter spreads.

You're correct that the cost significantly exceeds the saving in dividend tax for the forseeable future. But you're ignoring capital gains tax. If your holding continues to grow in a taxable account there is a decent chance you may have to pay CGT one day on it.

Moreover if you want to utilise your annual CGT-free allowance, then you're going to have to sell something anyway, so why not bed-and-ISA it at the same time?

Finally, a future government might start taxing dividends and capital gains as ordinary income. Of course, they could also abolish ISAs as well

[ikethespike]

That's correct - it's a one of loss of £360 for the sale and re-purchase into an ISA to save £45 dividend tax per annum (at the current basic rate) and there is no annual charge for the share plan compared with £39 per year for the ISA. Any further thoughts ?

Lootman - just read your reply which makes a lot of sense and has clarified my thoughts - thanks!

[midgesgalore]

I see another benefit in pursuing bed & ISA in the potential avoidance of a capital gains tax bill:
1. If you owned an IT that elected to close and returned a massive return on your initial investment
2. Likewise a bid on a company stock you own resolves itself as capital in return for your shares


midgesgalore

[77ss]

That's correct - it's a one of loss of £360 for the sale and re-purchase into an ISA to save £45 dividend tax per annum (at the current basic rate) and there is no annual charge for the share plan compared with £39 per year for the ISA. Any further thoughts ?

Lootman - just read your reply which makes a lot of sense and has clarified my thoughts - thanks!

Remember that you are not obliged to buy the same share in your ISA as you sell outside. Think of it as moving part of your portfolio rather than a specific share. Assuming, of course, that you have a portfolio.

I have been steadily moving funds from my unsheltered holdings into my ISAs for over a decade now, and I generally do it in two stages:

1 Sell or top-slice a holding when I think the price is good
2 Rebuy in the ISA IF the share price dips (and it often does, if you wait a few weeks - simple market fluctuation) OR buy a previously identified (essential) alternative.

You can do it in reverse of course. If you think the price is low, go overweight, by buying your share in an ISA, then sell your unsheltered holding after a price rise. You have to be prepared to stay overweight for some time, so some confidence in the holding is required.

Works for me. No guarantees of course. The minor downside, is that you incur two dealing costs, rather than one, but if you are going to move £20,000 this is a trivial consideration.

[Minesadouble]

Moderator Message:
Created topic to discuss a different topic but related to "Reality of Living off HYp dividends". Raptor.

Given that a number here do (or will) have alternative sources of income, such as pensions, I'd be interested in who is geared to use HYP to maximise UK tax-free income from Dividends (currently £5,000), and with what capital sum and by what spread of HYP shares.

(I might then opt to draw on cash savings to achieve that.)

Lots of interesting responses but no one appears to have answered your question.
Broad numbers, but to maximise the current allowance, I would have thought a portfolio of £100,000 (maybe a little more) would achieve that and a 20 to 25 Share HYP would give you sufficient diversification. Others may have different views.

MAD

[77ss]

Moderator Message:
Created topic to discuss a different topic but related to "Reality of Living off HYp dividends". Raptor.

Given that a number here do (or will) have alternative sources of income, such as pensions, I'd be interested in who is geared to use HYP to maximise UK tax-free income from Dividends (currently £5,000), and with what capital sum and by what spread of HYP shares.

(I might then opt to draw on cash savings to achieve that.)

Lots of interesting responses but no one appears to have answered your question.
Broad numbers, but to maximise the current allowance, I would have thought a portfolio of £100,000 (maybe a little more) would achieve that and a 20 to 25 Share HYP would give you sufficient diversification. Others may have different views.

MAD

I'm not sure that I really grasped the point of the original question.

I'm all for maximising tax-free income! But the OP seems to be focusing on the £5,000 allowance currently available for dividends received outside tax-shelters.

Given that the allowance will fall to £2,000 in the 2018-2019 tax year, this does not seem like sensible planning to me - perhaps there is a point I haven't understood?

[UncleEbenezer]

All my investment income is tax-free.

The majority of my portfolio by value is the SIPP. Under current rules, that could sometime incur tax, though at current annuity rates remains tax-free for life (unless the state pension converges with the tax threshold). Then there's the ISA, the VCT portfolio, and a handful of EIS-qualifying "fun punts". And finally, we now have that tax-exempt allowance on cash savings

Comes of my history. After going fairly suddenly from poverty (far below the level of jobseekers allowance, with the worst two years on below the UN's $1/day after my previous savings ran out) to two and a half years on a package worth nearly £100k, I resented the tax strongly enough to find out about avoiding it.

[tjh290633]

I took it to refer to the gradual movement of shares held outside an ISA into its shelter. As far as the amount of capital required is concerned, that is a question that nobody can answer, because everyone is different.

If you are running an HYP and getting 4.5% dividend yield, then £100,000 will give you £4,500 annual income. Multiply as required to get the desired income.

I don't know why people keep their investments with a manager who charges a percentage fee. It must be the power of advertising. There are plenty of brokers with flat fees at a low level and some with no fee. Dealing costs are low. In the early stages a percentage may be better, but it's easy to work out which is better for you.

TJH

[WessexBoy]

Many thanks for the replies (and to Mod/Raptor for starting the new thread).

I agree that I might have posed a naive question, but that is where this newbie is right now.
(Thanks for reminder that the Dividend Allowance falls to £2k next year. I also note that I can make use of the ISA allowance each tax year. I may also be able to prompt 'other half' to use this year's ISA allowance.)

I have never bought shares before, although I have a few as gifts. I have used the 2017/18 ISA allowance with Vanguard products: LS 80%; VUSA/S&P; Global Small Cap. Presently the return over two months is 3.82% which is not so shabby.

However, I do have more cash available for potential investment in HYP than the (£20k) ISA annual allowance provides for, so the Dividend Allowance is relevant as I don't want to have to start filling in tax forms (again) and thus wish to avoid entering the higher tax bracket.

So, is 4.5% is a useful 'whole year' planning figure for the expected dividend return on HYPs? And given the time of year, and the dates that dividends are declared, how might I get on board for a spread of HYPs that will realise a dividend payment? I can plan on the basis of £100,000 available to invest now - currently in various places attracting what I hope is max savings rates, but these are not a lot.

I realise that some of this is short term thinking, and should declare that I'm intending this for more than the short term: 10 years plus. However, I need to make a start, and would like to do this to best advantage this tax year.

[dspp]

Many thanks for the replies (and to Mod/Raptor for starting the new thread).

I agree that I might have posed a naive question, but that is where this newbie is right now.
(Thanks for reminder that the Dividend Allowance falls to £2k next year. I also note that I can make use of the ISA allowance each tax year. I may also be able to prompt 'other half' to use this year's ISA allowance.)

I have never bought shares before, although I have a few as gifts. I have used the 2017/18 ISA allowance with Vanguard products: LS 80%; VUSA/S&P; Global Small Cap. Presently the return over two months is 3.82% which is not so shabby.

However, I do have more cash available for potential investment in HYP than the (£20k) ISA annual allowance provides for, so the Dividend Allowance is relevant as I don't want to have to start filling in tax forms (again) and thus wish to avoid entering the higher tax bracket.

So, is 4.5% is a useful 'whole year' planning figure for the expected dividend return on HYPs? And given the time of year, and the dates that dividends are declared, how might I get on board for a spread of HYPs that will realise a dividend payment? I can plan on the basis of £100,000 available to invest now - currently in various places attracting what I hope is max savings rates, but these are not a lot.

I realise that some of this is short term thinking, and should declare that I'm intending this for more than the short term: 10 years plus. However, I need to make a start, and would like to do this to best advantage this tax year.

I few angles for you to think about, phrased simplistically (there are all sorts of nuances):

1. Whilst it is a no-brainer to use up the £20k ISA allowance each year, it is worth thinking about whether to do this at the start of the tax year or at the end. Moving £20k of high yield in as early as possible will also accelerate getting the (say) £20k x 5% = £1k of dividends inside the ISA in the same year, i.e. you get £21k into the ISA in a given year not just £20k, i.e. you win an extra £1k. The flip side is that you are surrendering the option of moving a corporate action target inside the ISA at any time during the year if it might trigger a CGT event that would otherwise exceed your spare CGT threshold. So moving early indicates you value the £1k reward over the unquantifiable CGT risk.

2. This leads on to a discussion about what is the best size of chunk to buy shares in. If you are (say) buying in £3k chunks, and if you are (say) buying 30 or so shares on your initial HYP tour, then you would end up with a £90k portfolio before you start doubling up. So even in the case where a 2x-yielding corporate action comes about then your maximum CGT gain becomes £3k (i.e. the target gets taken out for £6k, not the £3k you paid), which is probably OK given the £11k CGT allowance. Contrast this with someone who decided to build a 9-share HYP of £10k lumps. They are facing the prospect of a 2x on a £10k holding which is a lot closer to tipping them over the £11k CGT threshold.

3. Is it best to prioritise moving high-yield (dividend paying) shares into an ISA shelter, or is it best to prioritise moving high-growth shares (which may or may not exist in your HYP, or in a non-HYP portfolio you also have) into an ISA shelter, or shares which you think (for whatever reason) might be subject to a takeover bid. Do you wish to hold back loss-making shares in your trading account to sell so as to mop up any unwanted CGT gains ?

At the end of the day we all have to make our own decisions based on our own circumstances, and so we will all come to different but equally valid decisions. The three points above are the ones that exercise my mind when deciding when & what to move stuff from trading into HYP. Other people may have other concerns that are equally valid which never crossed my mind. However I am in no doubt that I always make full use of the HYP allowance each year. I am much more cautious in making use of SIPP as a shelter.

regards, dspp

[UncleEbenezer]

1. Whilst it is a no-brainer to use up the £20k ISA allowance each year, it is worth thinking about whether to do this at the start of the tax year or at the end. [...] The flip side is that you are surrendering the option of moving a corporate action target inside the ISA at any time during the year if it might trigger a CGT event that would otherwise exceed your spare CGT threshold. So moving early indicates you value the £1k reward over the unquantifiable CGT risk.

CGT only becomes a risk (and a "nice to have" one at that) once your portfolio reaches a pretty damn comfortable size. Not an issue for us less-than-millionaires.

On the other hand, I've usually delayed my ISA contribution for another reason. The possibility I might want the money earlier in the tax year, and earn enough to replace it later (the prospective scenario being if I were to buy a flat or house).

[WessexBoy]

Again, forgive naivety, I have never had to consider CGT:

"You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).
The tax-free allowance is: £11,300."

So, were I to buy £100,000 of EFTs and then later sell them, assuming that they appreciated by 20% over that time period, I would be liable for CGT of £20k less £11.3K?

May I assume that this tax-free allowance is annual? So I could sell in each of two years and not be liable for CGT?

Does CGT liability this apply to the capital growth of assets held in ISAs?

[Alaric]

Does CGT liability this apply to the capital growth of assets held in ISAs?

ISAs are tax free on gains. That's their other point.

The hazard with CGT and large holdings in one Company is that the Company might be taken over and trigger a gain in a single tax year. Let's say you bought at £ 5,000 some years back and the share has now quintupled in value, so your stake is now worth £ 25,000. There's then a takeover (Acorn a recent example perhaps). You now have a gain of £20,000 in excess of the annual CGT limit.

[tjh290633]

Again, forgive naivety, I have never had to consider CGT:

"You only have to pay Capital Gains Tax on your overall gains above your tax-free allowance (called the Annual Exempt Amount).
The tax-free allowance is: £11,300."

So, were I to buy £100,000 of EFTs and then later sell them, assuming that they appreciated by 20% over that time period, I would be liable for CGT of £20k less £11.3K?

May I assume that this tax-free allowance is annual? So I could sell in each of two years and not be liable for CGT?

Does CGT liability this apply to the capital growth of assets held in ISAs?

Yes, CGT allowance is annual and no, holdings in ISAs are exempt from CGT.

One point to bear in mind is, while there may be tax advantages when paying into a SIPP, withdrawals are subject to your marginal rate of income tax, after any tax-free withdrawals have been taken into account. It may therefore be better to receive taxable dividends than to go down the pension route.

TJH