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ITs that pay as income rather than dividends?
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- Lemon Pip
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ITs that pay as income rather than dividends?
When my SIPP PCLS arrives, self+spouse will have about £550k on unwrapped money to invest. £75k of this is in NS&I linkers and I'd plan to leave these untouched. We also have a fully-offset mortgage of £100k we can draw on if required so don't need a lot of cash to hand, though something as a buffer if I have to reduce my SIPP drawdown might be wise. Dunno.
Anyway, the plan is to "ISA up" as quickly as we can, but this will take over a decade. My wife won't have much/any other income so the bulk will be invested in her name. As income from unwrapped investments falls off (as we sell and ISA) she can ramp up her SIPP income.
We'll both get the £1k savings allowance and £2k dividend allowance. She could also get the £5k zero band for savings.
The dividend part is easy as I've run a high yield portfolio before and am also happy with something like the B7 alongside.
But what about the income? I know there are OEICs that pay out as income rather than dividends, and we could also hold corporate bonds or bond ETFs, but I'm wondering what others do to get a tax efficient income stream.
Anyway, the plan is to "ISA up" as quickly as we can, but this will take over a decade. My wife won't have much/any other income so the bulk will be invested in her name. As income from unwrapped investments falls off (as we sell and ISA) she can ramp up her SIPP income.
We'll both get the £1k savings allowance and £2k dividend allowance. She could also get the £5k zero band for savings.
The dividend part is easy as I've run a high yield portfolio before and am also happy with something like the B7 alongside.
But what about the income? I know there are OEICs that pay out as income rather than dividends, and we could also hold corporate bonds or bond ETFs, but I'm wondering what others do to get a tax efficient income stream.
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
gadgetmind wrote:But what about the income? I know there are OEICs that pay out as income rather than dividends, and we could also hold corporate bonds or bond ETFs, but I'm wondering what others do to get a tax efficient income stream.
When you say "income", do you really mean taxed with Income Tax, with a Personal Allowance applicable? I'm not sure I've heard of any investments that work that way.
Scott.
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- Lemon Pip
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Re: ITs that pay as income rather than dividends?
Basically things that meet this HMRC definition for the Savings Allowance. Anything beyond this is taxed as income in the normal way, with the usual rates and "stacking" order with earned, dividends, capital gains, etc. Oh, and there is also the £5k zero band for savings income.
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Savings income includes account interest from:
bank and building society accounts
accounts with providers like credit unions or National Savings and Investments (NS&I)
It also includes:
interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
income from government or company bonds
most types of purchased life annuity payments
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I can look at OEICs but am more interested in ITs that make interest distributions that are taxed as income/savings.
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Savings income includes account interest from:
bank and building society accounts
accounts with providers like credit unions or National Savings and Investments (NS&I)
It also includes:
interest distributions (but not dividend distributions) from authorised unit trusts, open-ended investment companies and investment trusts
income from government or company bonds
most types of purchased life annuity payments
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I can look at OEICs but am more interested in ITs that make interest distributions that are taxed as income/savings.
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- Lemon Slice
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Re: ITs that pay as income rather than dividends?
This is my speculation ... Isn't owning shares in an investment trust is just like owning any other companies share? And I've not noticed a mechanism for companies to give interest to shareholders. Just a share of profits via dividend. I'm just guessing here really.
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- Lemon Slice
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Re: ITs that pay as income rather than dividends?
I'm not an expert but I think Real Estate Investment trusts REIT's pay out interest rather than income.
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- The full Lemon
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Re: ITs that pay as income rather than dividends?
Corporate Bond funds are the obvious way to generate interest income and as far as I know they will be OEICS most likely. I have a few.
Dod
Dod
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- Lemon Pip
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Re: ITs that pay as income rather than dividends?
Yeah, I know about OEICs, but am looking for alternatives.
I did consider REITs but these pay both dividends and PIDs, and you have to sort which is which.
A few bond ETFs or (subject to hours of research!) a portfolio of corporate bonds might do the trick.
I did consider REITs but these pay both dividends and PIDs, and you have to sort which is which.
A few bond ETFs or (subject to hours of research!) a portfolio of corporate bonds might do the trick.
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
gadgetmind wrote:... I did consider REITs but these pay both dividends and PIDs, and you have to sort which is which. ...
If you find a REIT that never pays a normal dividend, it might be worth noting that PIDs are treated as "generally taxable as profits of a UK property business for income Tax purposes" as per https://www.gov.uk/hmrc-internal-manual ... l/saim5330 .
Unfortunately, the fairly recently introduced property allowance of £1,000 is not applicable to PIDs, despite their treatment above.
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- Lemon Quarter
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Re: ITs that pay as income rather than dividends?
gadgetmind wrote:We'll both get the £1k savings allowance and £2k dividend allowance. She could also get the £5k zero band for savings.
The dividend part is easy as I've run a high yield portfolio before and am also happy with something like the B7 alongside.
But what about the income? I know there are OEICs that pay out as income rather than dividends, and we could also hold corporate bonds or bond ETFs, but I'm wondering what others do to get a tax efficient income stream.
I don't follow what you are trying to achieve. Once you have used up the various allowances you refer to, for any given level of income, dividends are more lightly taxed than interest.
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
genou wrote:gadgetmind wrote:We'll both get the £1k savings allowance and £2k dividend allowance. She could also get the £5k zero band for savings.
The dividend part is easy as I've run a high yield portfolio before and am also happy with something like the B7 alongside.
But what about the income? I know there are OEICs that pay out as income rather than dividends, and we could also hold corporate bonds or bond ETFs, but I'm wondering what others do to get a tax efficient income stream.
I don't follow what you are trying to achieve. Once you have used up the various allowances you refer to, for any given level of income, dividends are more lightly taxed than interest.
I think the OP is seeking to ensure his wife's savings allowance and the starting rate for savings is fully utilised and, on the latter, we know the level of her non-savings is likely to be low as My wife won't have much/any other income.
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- Lemon Quarter
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Re: ITs that pay as income rather than dividends?
PinkDalek wrote:genou wrote:gadgetmind wrote:We'll both get the £1k savings allowance and £2k dividend allowance. She could also get the £5k zero band for savings.
The dividend part is easy as I've run a high yield portfolio before and am also happy with something like the B7 alongside.
But what about the income?
I think the OP is seeking to ensure his wife's savings allowance and the starting rate for savings is fully utilised and, on the latter, we know the level of her non-savings is likely to be low as My wife won't have much/any other income.
I think I've over thought things then. I thought we were talking about what happens after the allowances are used. Since the 5k savings allowance will cover either interest or dividends, we are down to worrying about 1k of income. Which means, allowing for bank interest on cash, we are looking at GBP900, or less.
So about 15k nominal of PAG2 or PAG3, or a holding in 42TE. Any of these are going to be a trivial percentage of their joint portfolio. Or a bond ETF, but the amount of capital required to generate the income will be higher.
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
gadgetmind wrote:A few bond ETFs or (subject to hours of research!) a portfolio of corporate bonds might do the trick.
There's a handful of ITs that because of their investments distribute interest rather than dividends. Those that specialise in loans are an example.
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- Lemon Pip
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Re: ITs that pay as income rather than dividends?
Sorry to be lazy, but do you have a list of those ITs?
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
genou wrote:
I think I've over thought things then. I thought we were talking about what happens after the allowances are used. Since the 5k savings allowance will cover either interest or dividends, ...
Sorry but I don’t think the £5,000 starting rate for savings would cover dividends, only interest as per:
https://www.gov.uk/apply-tax-free-interest-on-savings
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
1nv35t wrote:PinkDalek wrote:gadgetmind wrote:... I did consider REITs but these pay both dividends and PIDs, and you have to sort which is which. ...
If you find a REIT that never pays a normal dividend, it might be worth noting that PIDs are treated as "generally taxable as profits of a UK property business for income Tax purposes" as per https://www.gov.uk/hmrc-internal-manual ... l/saim5330 .
Unfortunately, the fairly recently introduced property allowance of £1,000 is not applicable to PIDs, despite their treatment above.
Non reporting funds capital gains and dividends are counted as income for tax purposes. ...
I’m unsure why you replied to my post regarding the UK tax treatment of PIDs but the OP appears to be seeking income that is taxable as interest, nor merely taxable income per se.
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- Lemon Pip
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Re: ITs that pay as income rather than dividends?
Hmmm, if my wife earns £10k, and then puts £8k into her SIPP that's then grossed to £10k, how much untaxed savings income can she have?
I'd like to think the full personal allowance, plus £1k plus another £5k, but maybe her taxable income is used for the starting rate calculation rather than her adjusted income?
I'd like to think the full personal allowance, plus £1k plus another £5k, but maybe her taxable income is used for the starting rate calculation rather than her adjusted income?
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- Lemon Pip
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Re: ITs that pay as income rather than dividends?
OK, ignore pension but please check my working.
Tax year 2018/19 for allowance £11,850 but Dividend Allowance slashed to £2k.
Income £6600
Cash interest £300
Bond interest £2950
Dividends £6750
We can allocate £5250 (11,850-6600) of the dividends to the personal allowance, leaving £1,500 of dividends.
The cash and bond interest is then within the savings allowance and zero bond, so no tax.
The dividends are within the dividend allowance, so no tax.
This thread (particularly latter parts) was helpful to work this out, whereas all online calculators were pants!
viewtopic.php?f=49&t=7455
Tax year 2018/19 for allowance £11,850 but Dividend Allowance slashed to £2k.
Income £6600
Cash interest £300
Bond interest £2950
Dividends £6750
We can allocate £5250 (11,850-6600) of the dividends to the personal allowance, leaving £1,500 of dividends.
The cash and bond interest is then within the savings allowance and zero bond, so no tax.
The dividends are within the dividend allowance, so no tax.
This thread (particularly latter parts) was helpful to work this out, whereas all online calculators were pants!
viewtopic.php?f=49&t=7455
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
gadgetmind wrote:OK, ignore pension but please check my working.
Tax year 2018/19 for allowance £11,850 but Dividend Allowance slashed to £2k.
Income £6600
Cash interest £300
Bond interest £2950
Dividends £6750
We can allocate £5250 (11,850-6600) of the dividends to the personal allowance, leaving £1,500 of dividends.
The cash and bond interest is then within the savings allowance and zero bond, so no tax.
The dividends are within the dividend allowance, so no tax. ...
When you say "Income" I assume that means Non savings income. That being the case, I think your figures are correct but, to double check, I'll word it the way I'd do the calculations:
Personal allowance £11,850
Applied against Non Savings income -£6,600
Balance of PA £5,250
Applied against dividends £5,250 (although this could be shown as £3,250, to leave £2,000, but the end result should be the same).
Non savings income - £6,600. Fully covered by personal allowance
Dividends - £6,750. £5,250 covered by personal allowance. £1,500 falls within the £2,000 dividend allowance.
Savings income - Total £3,250 which is not reduced by any remaining personal allowance, as all used above, and is less than £5,000, so all chargeable at the Starting rate for savings nil rate.
Which is really what you've said!
What hasn't been used is the £1,000 Personal savings allowance.
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- Lemon Pip
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Re: ITs that pay as income rather than dividends?
Thanks for that.
I may move move more bond/interest income to my wife and assume my SA will be £500 for safety.
I'm assuming 2.5% income from bonds and 3% from equities. Reasonable?
Between the two of us, I can easily invest £450+ even while I'm drawing down my pension right to the top of the 20% band and my wife is still working part time. I just wish there was an easy HMRC calculator that backed this up. I did find a 3rd party one with lots of bells and whistles, but it failed to use the PA for dividends, which shows some shoddy behind the scenes coding.
I may move move more bond/interest income to my wife and assume my SA will be £500 for safety.
I'm assuming 2.5% income from bonds and 3% from equities. Reasonable?
Between the two of us, I can easily invest £450+ even while I'm drawing down my pension right to the top of the 20% band and my wife is still working part time. I just wish there was an easy HMRC calculator that backed this up. I did find a 3rd party one with lots of bells and whistles, but it failed to use the PA for dividends, which shows some shoddy behind the scenes coding.
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- Lemon Half
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Re: ITs that pay as income rather than dividends?
gadgetmind wrote:I'm assuming 2.5% income from bonds and 3% from equities. Reasonable?
Between the two of us, I can easily invest £450+ even while I'm drawing down my pension right to the top of the 20% band and my wife is still working part time. I just wish there was an easy HMRC calculator that backed this up. I did find a 3rd party one with lots of bells and whistles, but it failed to use the PA for dividends, which shows some shoddy behind the scenes coding.
I don't know about the bonds, but Gilts are nowhere near that figure. http://www.dmo.gov.uk/data/pdfdatarepor ... tCode=D10B will give you the latest prices for the last trading day (2nd March at the moment).
Equities are doing rather better, see this list for examples:
Rank EPIC Yield
1 TW. 8.14%
2 SSE 7.60%
3 MARS 7.35%
4 VOD 6.63%
5 IMB 6.61%
6 MKS 6.52%
7 BT.A 6.52%
8 BP. 6.46%
9 RDSB 6.20%
10 GSK 6.20%
11 ADM 6.18%
12 NG. 6.03%
13 UU. 5.91%
14 RIO 5.84%
15 LGEN 5.78%
16 S32 5.53%
17 BLT 5.09%
18 TATE 5.09%
19 AV. 4.88%
20 BLND 4.79%
21 BATS 4.63%
22 LLOY 4.55%
23 AZN 4.28%
24 WMH 4.19%
25 BA. 3.78%
26 IMI 3.51%
27 ULVR 3.38%
28 SMDS 3.37%
29 KGF 3.01%
All those are above 3%, so you should be able to find some reasonable ones from amongst them.
TJH
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