Holdings in a taxable account

[Indig0]

I am keen to optimise the holdings in my taxable account, as I think at present this may not be the case.

I max out my ISA and SIPP allowance each year, so any surplus funds are put into a general investment account amongst other things.

From a tax perspective, am I right in thinking that any dividends received, even if re-invested (either by the platform or as acc units) in the general account need to be included in my self-assessment return? I receive most of my personal income as dividends from my limited company so I already fully use the £2k dividend allowance.

On the above point, I keep asking my accountant if this is the case but his view is that these do not need to be reported!

Are there any particular types of holdings I should move into for this account? I was thinking that growth funds that did not pay any dividend would be a better choice - I can then sell these when required to use up my capital gains allowance and then re-purchase at a later date? I also aim to sell off holdings in the general account to fund each years ISA contribution so I can try to keep at a decent level.

Any other suggestions?

[Alaric]

From a tax perspective, am I right in thinking that any dividends received, even if re-invested (either by the platform or as acc units) in the general account need to be included in my self-assessment return?

That's correct and something of an annual headache to track and record the amounts. If you were a basic rate taxpayer, it didn't use to affect your tax liability if you missed one or two, but now it does, because of the £ 2,000 limit.

Funds or shares not paying dividends can be the best fit from a tax reduction point of view.

[tjh290633]

Yes, you are correct. Your dividend income is clearly above the limit and must be reported.

Regarding the disposition of your assets, the obvious move would be to swap higher yield shares outside your tax shelters for lower yield securities inside those shelters. Obviously not by taking cash out of the shelter, but by selling inside the shelter and buying the replacement inside the shelter with the funds released. Outside the shelter you have the choice of staying in cash until the new tax year or buying something suitable outside. That would be something which pays no dividends or has a very low yield. It does not mean an accumulation fund, the reinvested income of which is taxable

TJH

[Indig0]

Thank you, both - I will email my accountant and probably start looking for a new one shortly!

Are there any popular 0% yield funds that are generally favoured on these boards (ideally with an OCF of less than 1%)? I don't have any direct holdings in equities however if that is the easiest way to avoid any tax in these accounts then I guess I can go down that route instead.

[tjh290633]

Thank you, both - I will email my accountant and probably start looking for a new one shortly!

Are there any popular 0% yield funds that are generally favoured on these boards (ideally with an OCF of less than 1%)? I don't have any direct holdings in equities however if that is the easiest way to avoid any tax in these accounts then I guess I can go down that route instead.

Not a recommendation, but I have held JP Morgan Natural Resources Fund for many years, since it was Ebor Commodity Fund in 1970.

It did not pay dividends until recently, since 1995. The last annual dividend was 3.03p on a unit price just over £6. I make that a yield of about 0.5%. You may find something similar if you search diligently.

TJH

[TUK020]

The other thing you need to keep an eye on is exposure to Capital Gains Tax.

After getting a sizeable redundancy payment in 2009, I wound up investing a chunk in the FTSE100 index with fortuitous timing.
Into a rising market, I had to churn FTSE investment into FTAS? (whichever was the strong overlap) to make sure I used CGT allowance (and didn't need to report sales on tax return).
Annual ISA, SIPP allowances, school fees, university child support etc have solved the taxable account problem.

CGT is a 'quality problem' that I have yet to experience.
Here's hoping that the markets rise sufficiently that you have a big issue with this.

[hiriskpaul]

There are a few things you can do which may help. Firstly dividends from foreign shares often have dividend withholding taxes, for example dividends on US shares have 15% deducted if you fill in a W8-BEN. These withholding taxes can be used to offset the UK income tax on those shares. So for basic rate taxpayers, paying 7.5% dividend tax, there would be no more UK tax to pay. If you hold foreign shares in a fund of some sort, that fund will be subject to withholding taxes and dividends paid by the fund will be subject to UK income tax, with no allowance for the withholding tax the fund has already paid. So a portfolio of US shares, which tend to have lower dividends than UK shares anyway, is more tax efficient than a US fund. You also get a tax credit on dividends from US listed ETFs, so holding say the Vanguard US listed S&P 500 ETF is more tax efficient than holding the equivalent UK listed ETF (management charges are lower as well). Unfortunately though it is hard for UK retail investors to buy US listed ETFs now due to the introduction of some annoying regulations. It can still be done, but you have to find a broker that will accept you as a professional investor. The only broker I use that allows me to buy US listed ETFs now is IG. There are still no restrictions on buying individual US listed shares though, just funds.

If you do manage to buy US listed ETFs, make sure these have UK reporting status, otherwise you will pay income tax on capital gains (all Vanguard ETFs have UK reporting status). That leads me to the second possibility, accumulating, non-reporting offshore funds. These funds will roll up dividend income with no income tax liability. However, you pay income tax when you sell such funds and transfer the cash to the UK. Note that is income tax on the whole gain, capital and dividends. This might work out for someone paying high rates of tax now, but expects to be in a position to pay lower rates (or none at all) in the future. There are products called offshore bonds, sold by L&G, Prudential, etc. that are similar to offshore funds, but not identical. I forget how they work precisely, but might be worth a look.

Another possibility are shares that pay little to no income. The classic example is Berkshire Hathaway. In some ways this is similar to a fund in that it holds widely diversified investments, but it is not a fund, so the HMRC cannot tax you on the income it is generating internally and reinvesting.

You might want to consider holding investments inside your ltd company. Dividends are untaxed, but you pay corporation tax on gains following disposal (with no CGT allowance). This tax regime makes high yielding shares ideal for holding in limited companies (I hold NatWest preference shares in mine). There was a time when you could use inflation indexation to reduce capital gains, but unfortunately Hammond has put a stop to future indexation.

VCTs are another possibility as all income and gains from these are tax free. If you buy new issues you also get 30% tax relief, but have to refund this if yopu sell within 5 years. I have decided not to put more cash into VCTs though as the rules have been tightened up such that qualifying investments are more risky and there are fewer available. VCTs are very popular as well, which I think might lead to too much VCT cash chasing too few opportunities.

[hiriskpaul]

One other possibility to avoid income and push forward capital gains is to flip between funds. As an example, consider the iShares ETF CSP1, an accumulating S&P 500 ETF. If you hold it on 31 July, you are deemed to have received dividend income on it, but if you sell before the end of July and buy at the beginning of August, you avoid liability for tax on the income. Furthermore the sell at the end of July will be matched with the buy at the beginning of August (30 day rule) for CGT purposes, so your capital gain or loss should be relatively small. To mitigate against a large movement in the price between the sell and subsequent buy, you can buy a different S&P 500 fund for a few days, such as the iShares distributing ETF IUSA. Any capital gain you make on one ETF should be wiped out by the capital loss on the other. When you eventually sell CSP1, the disposal will be matched with your original purchase price, not the intermediate purchases matched by the 30 day rule. Of course if you did want to book a capital gain, to utilise the annual allowance, extend the sell/buy period to beyond 30 days. That will match the disposal with the original purchase.

Obviously this trick will only work when flipping between investments with tight spreads and preferably no stamp duty, such as ETFs, otherwise the amount lost in charges and spreads may make the whole exercise pointless.

[Indig0]

Thank you for these latest suggestions - most appreciated.

I've now sold my Scottish Mortgage and Lindsell Global Equity positions and have bought into HVPE as a start. I appreciate the charges are a little higher on this but I like the diversification this holding will add to my overall portfolio.

Berkshire Hathaway looks ideal for my next move, although I will wait for some of my other existing funds to recover a little more after the shaky end to 2018. The latest I will liquidate these will be mid-March so I can go into the new tax year in fairly good shape (at least from an administrative perspective!)

I will probably hold onto my Fundsmith Equity Acc units for now as the yield on these is low enough that a small annual tax payment is worth it for overall capital gains I expect it to make.