Does your strategy change when ISAs aren't available for new investments?

[spiderbill]

I'm interested in how members here who either have filled their ISAs or have no ISA allowance due to for instance living overseas, adjust their strategies - if at all.
I'm thinking in terms of types of equities or ITs that you invest in outside a tax wrapper. If you've followed a mostly HY strategy does it make any sense to invest in lower yields and growthier shares outside the wrapper (while reinvesting any divis inside wrappers into the usual HY suspects) in order to minimise tax paid on dividends or is that letting the tax tail wag the investment dog?

I've been keeping a fairly large amount in cash for the last couple of years for various reasons but now that I've committed to 30k Euros of house renovations and done the sums I can see that even after a replacement car next year I'll still have some left over for investment. However I find myself swithering over how best to place it and am realising that I don't really have a proper thought-out plan - never a good thing.

So many UK articles and discussions focus so much on ISAs that it's hard to discard those thoughts when planning in a non-ISA environment. Should I just forget about the tax implications and invest normally on the basis that if I'm paying more tax then I'm earning more return, or is there an alternative strategy that allows for it?

TIA
Spiderbill

[Itsallaguess]

I'm interested in how members here who either have filled their ISAs or have no ISA allowance due to for instance living overseas, adjust their strategies - if at all.

I'm thinking in terms of types of equities or ITs that you invest in outside a tax wrapper.

If you've followed a mostly HY strategy does it make any sense to invest in lower yields and growthier shares outside the wrapper (while reinvesting any divis inside wrappers into the usual HY suspects) in order to minimise tax paid on dividends or is that letting the tax tail wag the investment dog?

I'm still working, and so I've found myself to be a bit cash-heavy in recent years, and as a primarily income-oriented investor who prefers to remain ducking underneath the rapidly-lowering dividend-allowance, over time I've landed on the following unsheltered processes that sit quite comfortably with me -

• Vanguard 60/40 LifeStrategy - With a low yield of around 1.7%, very low charges, and a broad investment remit, I've been happy to allocate some capital to this investment for a few years now, with relatively older funds that I've not been able to shelter due to filling ISA allowances already

• Premium Bonds - Strictly-speaking, these funds are one layer of what's hoped to be a post-work safety-strategy, but it's a useful bucket to flow excess funds into in terms of never having to worry about any unsheltered tax implications at all, and with a general return that provides some regular pocket money, it also delivers some pleasurable monthly-draw excitement

• Index-Linked Gilts - A new repository for me, and one which has attracted attention from a number of Lemon Fools in recent months - see https://www.lemonfool.co.uk/viewtopic.php?f=52&t=40044

• JPMorgan Indian Investment Trust (JII) - A concious and longer-term strategic shift, driven by trends in unsheltered dividend-allowances and a problem of 'cash-heaviness' that I thought might be shorter term than is actually playing out, is one where I will if possible actively seek to utilise available CGT allowances going forwards, with a view that such an approach might hopefully provide additional 'regular income' from CGT-related yearly sales, from zero-yield investments in my unsheltered shares-account, with my long-term rationale behind this JII purchase detailed here - https://www.lemonfool.co.uk/viewtopic.php?f=76&t=40842&p=618262#p618262

In addition to the above, I've usually got a fairly chunky additional layer of cash sitting in my unsheltered account, ready to be deployed early in any new tax-year, but I've been lucky over recent years to have had a regular excess over and above the ISA allowances, taking into account the fact that I've also been rotating out of single-share 'HYP-like' holdings in that unsheltered account and moving some of those funds into the new-ISA capital for ISA-related income-investment, so it's been an interesting journey for me in recent years to have to start thinking along the lines that you're also scratching your head about, and finding that even as a primarily income-oriented investor, the above solutions have been found to sit easy with me, and align with my investor-temperament really quite well, which has been a nice surprise.

One thing I would add as a slight caveat to the above is that I'm still working and, if I allow myself to squint a little, there's a landing-zone in the medium term into what might be a non-working environment, and I think I'll probably find that when my wage-taps are finally turned off, any new ISA allowances will be much more difficult for me to fill from what would normally have been wage-related sources, but I do hope and plan to then be able to back-fill any post-work ISA allowances with some of the above unsheltered capital over a number of years after finishing work, which if I cross my fingers, is planned to provide an additional layer of 'safety' to my post-work dividend income, in the form of some years of fresh post-work income-investment still continuing, so in that context, I'm really fairly comfortable with carrying quite a lot of unsheltered capital in the above pots, so long as they're hopefully able to 'work for their living', at least to some extent, whilst those longer-term plans can then hopefully play out...

Personally, I don't particularly see any of the above as me allowing the tax-tail to wag the investment-dog. For me it's just a sub-set of investment-processes operating slightly away from my normal income-investment strategy that's hoping to allow unsheltered capital to work at some level, within what's been a fairly rapidly-changing landscape in terms of unsheltered dividend and CGT tax-allowances. I've been lucky that for many years I've not had to fill out a self-assessment form, and I'm keen to keep things that way if it's possible, and fairly pain-free to do so...

Cheers,

Itsallaguess

[88V8]

I'm interested in how members here who either have filled their ISAs or have no ISA allowance due to for instance living overseas, adjust their strategies - if at all.
I'm thinking in terms of types of equities or ITs that you invest in outside a tax wrapper. If you've followed a mostly HY strategy does it make any sense to invest in lower yields and growthier shares outside the wrapper (while reinvesting any divis inside wrappers into the usual HY suspects) in order to minimise tax paid on dividends or is that letting the tax tail wag the investment dog?

As an income investor I do try to put my yieldier holdings into the ISA. Also holdings - primarily bonds - that pay interest, in view of the tax differential.
If I have high-yield holdings that are showing a capital loss - currently, DEC - then depending on my CGT position I might wish to crystallise the loss and evict lower yielders from the ISA to make room for a bed & ISA of the high yielders.

I try to avoid burdening the ISA with things that may not turn out well, given any losses cannot be claimed.

So to an extent I do let the tax tail wag.
I think one is rather foolish if one does not, especially once one has achieved the ambition of paying HRT

V8

[daveh]

I'm interested in how members here who either have filled their ISAs or have no ISA allowance due to for instance living overseas, adjust their strategies - if at all.
I'm thinking in terms of types of equities or ITs that you invest in outside a tax wrapper. If you've followed a mostly HY strategy does it make any sense to invest in lower yields and growthier shares outside the wrapper (while reinvesting any divis inside wrappers into the usual HY suspects) in order to minimise tax paid on dividends or is that letting the tax tail wag the investment dog?

TIA
Spiderbill

I have most of my investments in my ISAs in high yield shares, prefs, ITs and ETFs. I have a small % in VWRL (chosen rather than VHYL as at the time the yields weren't that different, but the performance was).

I have about a year or so of expenditure (not needed as I'm still employed but available for emergencies, house repairs new car etc) sitting in cash. It was all in bank accounts paying sweet fa but now that interest rates have gone up and I'd be earning more than the 1k interest allowance I've moved a significant chunk to short dated low coupon gilts (TN24, TN25, T26, TN28 and TG31) so I stay within the 1k allowance.

I moved a a significant quantity of HY yield shares from my GIA into ISAs again to get the taxable dividend income below the new £1000 dividend allowance and heading towards next years £500 allowance. Still got a chunk of SMDS to go, but that left cash in the GIA this year so I invested that in SMT as a place holder. Chose SMT as it has a nice low dividend, has previously had good growth and is sitting at a significant discount.

[kempiejon]

I also do a bit of tax planning on investments, not so different to thoughts offered on premium bonds, gilts, moving yieldy investments to ISAs and planning sales to harvest the maximum capital gains allowance. I suppose that is letting the tax wail wag the investment dog, I also fill my SIPP. I hold a contrary ambition and moved myself out of the tax burden a few years ago and do not expect to pay income tax until I draw my state pension with current allowances. I paid some dividend income tax as the threshold reduced faster than I could redirect my funds but that's all sheltered now.

[spiderbill]

I'm still working, and so I've found myself to be a bit cash-heavy in recent years, and as a primarily income-oriented investor who prefers to remain ducking underneath the rapidly-lowering dividend-allowance, over time I've landed on the following unsheltered processes that sit quite comfortably with me -

• Vanguard 60/40 LifeStrategy - With a low yield of around 1.7%, very low charges, and a broad investment remit, I've been happy to allocate some capital to this investment for a few years now, with relatively older funds that I've not been able to shelter due to filling ISA allowances already

That's one that I haven't looked at for a few years, but probably should have as an easy way into bonds now that they're a bit more back in favour. Will do some research on them.

• Premium Bonds - Strictly-speaking, these funds are one layer of what's hoped to be a post-work safety-strategy, but it's a useful bucket to flow excess funds into in terms of never having to worry about any unsheltered tax implications at all, and with a general return that provides some regular pocket money, it also delivers some pleasurable monthly-draw excitement

I should probably have put some in that direction three or four years ago when bank interest was effectively zero. Might have made something towards combating inflation without worrying about tax.

• Index-Linked Gilts - A new repository for me, and one which has attracted attention from a number of Lemon Fools in recent months - see https://www.lemonfool.co.uk/viewtopic.php?f=52&t=40044

I've noticed the recent postings and have been wondering about dipping a toe. I know nothing about gilts but really should learn quickly.

• JPMorgan Indian Investment Trust (JII) - A concious and longer-term strategic shift, driven by trends in unsheltered dividend-allowances and a problem of 'cash-heaviness' that I thought might be shorter term than is actually playing out, is one where I will if possible actively seek to utilise available CGT allowances going forwards, with a view that such an approach might hopefully provide additional 'regular income' from CGT-related yearly sales, from zero-yield investments in my unsheltered shares-account, with my long-term rationale behind this JII purchase detailed here - https://www.lemonfool.co.uk/viewtopic.php?f=76&t=40842&p=618262#p618262

That's an interesting one - a more extreme version of what I've been doing with FCIT, which has now started looking decent again after a
decidedly disappointing few months. I had also bought some BRGE with the same idea in 2021 but after a promising start it got hammered by the Ukraine war and hasn't yet recovered.
I have a couple of JPM ITs but that one hadn't crossed my radar - will take a look.

In addition to the above, I've usually got a fairly chunky additional layer of cash sitting in my unsheltered account, ready to be deployed early in any new tax-year, but I've been lucky over recent years to have had a regular excess over and above the ISA allowances, taking into account the fact that I've also been rotating out of single-share 'HYP-like' holdings in that unsheltered account and moving some of those funds into the new-ISA capital for ISA-related income-investment, so it's been an interesting journey for me in recent years to have to start thinking along the lines that you're also scratching your head about, and finding that even as a primarily income-oriented investor, the above solutions have been found to sit easy with me, and align with my investor-temperament really quite well, which has been a nice surprise.

Sounds like you're a couple of years ahead of me in your decision making so this is food for thought. I suppose I always knew there must be far more strategies and tactics that I should learn about investing than the LTBH and HYP-ish areas which were the first that made sense to me, but perhaps didn't expect that I'd need to utilise them.

One thing I would add as a slight caveat to the above is that I'm still working and, if I allow myself to squint a little, there's a landing-zone in the medium term into what might be a non-working environment, and I think I'll probably find that when my wage-taps are finally turned off, any new ISA allowances will be much more difficult for me to fill from what would normally have been wage-related sources, but I do hope and plan to then be able to back-fill any post-work ISA allowances with some of the above unsheltered capital over a number of years after finishing work,

I'm also still working part time - I've cut my clients down to two and plan to stop completely in about a year. Only earning about 15k now but with having started taking the state pension and having rental income from a house I inherited I've had more cash (and paid more tax) than for the previous few years. Really I should have retired before now but my clients wanted me to carry on, I enjoy the work, and I was subsidising my girlfriend's expenses where she lives and didn't want to burn my earning bridges.

I should also have started thinking about this stuff properly before now but the last couple of years I've been very conscious of the fatigue caused by the rheumatic condition I developed and that I wasn't always in the best situation to make large financial decisions. Now that I'm almost back to normal it's catch-up time.

Personally, I don't particularly see any of the above as me allowing the tax-tail to wag the investment-dog. For me it's just a sub-set of investment-processes operating slightly away from my normal income-investment strategy that's hoping to allow unsheltered capital to work at some level, within what's been a fairly rapidly-changing landscape in terms of unsheltered dividend and CGT tax-allowances. I've been lucky that for many years I've not had to fill out a self-assessment form, and I'm keen to keep things that way if it's possible, and fairly pain-free to do so...

That's an illuminating mindset and approach and it sounds like you're well sorted for the future. Maybe I've been allowing that same set of changes in dividend taxation and CGT allowances to over-complicate my thinking. Much to ponder. I may also broach the subject with my accountant - being self-employed I've used one for my tax return for about the last 16 years. While I don't expect "advice" it may be that they'll have a better feel for general investing tactics in the changing tax environment.

Many thanks for your considered reply, much appreciated.

cheers
Spiderbill

[spiderbill]

I'm late thanking 88V8, daveh, and kempiejon for their contributions - a sudden flurry of work, including having to read a book. Thanks for your thoughts.

I find it interesting that even when we're talking about a non-ISA situation we end up mention ISAs quite a lot! That's not a criticism - just a reflection of how much ISAs have dominated much of UK investing since their introduction. It would be interesting to know if overseas financial forums, where there are no equivalent tax shelters, think about things in a very different way and what their strategies tend to be.

cheers
Spiderbill

[dealtn]

I'm interested in how members here who either have filled their ISAs or have no ISA allowance due to for instance living overseas, adjust their strategies - if at all.
I'm thinking in terms of types of equities or ITs that you invest in outside a tax wrapper. If you've followed a mostly HY strategy does it make any sense to invest in lower yields and growthier shares outside the wrapper (while reinvesting any divis inside wrappers into the usual HY suspects) in order to minimise tax paid on dividends or is that letting the tax tail wag the investment dog?

I've been keeping a fairly large amount in cash for the last couple of years for various reasons but now that I've committed to 30k Euros of house renovations and done the sums I can see that even after a replacement car next year I'll still have some left over for investment. However I find myself swithering over how best to place it and am realising that I don't really have a proper thought-out plan - never a good thing.

So many UK articles and discussions focus so much on ISAs that it's hard to discard those thoughts when planning in a non-ISA environment. Should I just forget about the tax implications and invest normally on the basis that if I'm paying more tax then I'm earning more return, or is there an alternative strategy that allows for it?

TIA
Spiderbill

The tax "tail" doesn't wag my investment "dog"

Then again when I look at income, it is that coming in to the company, not that paid out to shareholders, that determines my valuation of the company, and its attractiveness to me when looking at its available price in the market.

I accept I am in the minority.

[Lootman]

when I look at income, it is that coming in to the company, not that paid out to shareholders, that determines my valuation of the company, and its attractiveness to me when looking at its available price in the market.

I accept I am in the minority.

That should really not be a minority view. Investors should first and foremost look at earnings. I am more interested in the earnings yield than the dividend yield. The former tells me something about the quality and potential of an investment. The dividend is really just a policy decision. And indeed a high dividend might make me think that that company does not or cannot invest internally with any confidence or success, and/or has gone ex-growth, and instead is trying to bribe investors with their own money.

UK investors seem strangely obsessed with dividends compared to investors elsewhere, and I do not really understand that point of view. That they create tax events is just another reason to be wary of them. The running dividend yield on my taxable portfolio is under 1%. In my ISA, 2% or less.

[spiderbill]

This thread may have already run its course, but if anyone else does respond to it I would ask them to address the original question and not the irrelevant points made in the last two posts - which I consider thread hijacking.

The question asked was in the context of "If you've followed a mostly HY strategy...". It was not in any way concerned with valuation of individual companies or asking for opinions on HY versus any other overall strategy.

I do not want this thread turned into yet another pointless arguement about dividends versus growth or total return versus any other approach between people who will never agree; which I suspect have caused many people to stop participating in discussions or to leave the board altogether. If it does go in that direction I will ask the mods to close it.

One of the two posters was already on my block list. I would prefer not to make it two.

Thanks to everyone who sticks to the subject - here and elsewhere.

Spiderbill

[dealtn]

This thread may have already run its course,...

You, as the OP, were the contributor that introduced "low yield" and "growthier shares" and the phrase about the tax tail on the investment dog. How does their discussion represent thread hijacking when it is a literal response to your introduction?