Investing for capital gain

[fca2019]

"A fund with over 60% of its assets in bonds is counted as paying interest, "

Thanks- see you're right. I'm peed off with this. My carefully thought out strategy needs rethinking now!

[EthicsGradient]

If you hold a Vanguard fund with 40% equity content, it's all treated as interest. If you hold the underlying ETFs as 40% equity and 60% fixed interest, that's treated as 40% dividend and 60% interest. Whether that's good or bad depends on your personal tax position, but it means you can hold investments with a choice on how you are taxed.

"All treated as interest" didn't used to be the case - do you know for certain that changed? From Oct 2018:

I emailed Vanguard UK directly regrading the LS40 interest or dividends and got the following response

Vanguard Message Number NCRE-B5PHFP

Dear xxx,

Thank you for getting in touch with the crew here at Vanguard.

That is a great question!

I can confirm that for tax purposes the income received from the LifeStrategy 40% Equity Fund – Income is classed as dividends.

https://monevator.com/using-vanguard-li ... unds-life/

[Quint]

You might also consider growth oriented Investment Trusts.

Alliance
Witan
Foreign & Colonial

are among the ones mentioned on the I.T. board

Scottish Mortgage.

[jaizan]

Exactly.

There are plenty of Investment Trusts with a very good record and a low yield.
e.g.
JEO (0.7%)
FEET (0.2%) Edit: This one doesn't have a good record, but does have a star manager.
BGS (0.7%)

Even if you pay higher rate tax, 32.5% x 0.7% amounts to 0.23% of your holding.

Also, every time I buy anything with a decent dividend yield, it has gone in the ISA or SIPP.
The taxed accounts are mainly for low yielding investment trusts and the occasional stock.

Therefore, the investments in my taxed accounts are mainly low yield and I can just about get it under the £2k dividend allowance.

I make sure I prioritise taking capital gains on anything with a yield and repurchasing it within the ISA. I have a spreadsheet dividing the dividend by the capital gain to guide me on that.

Having taken early retirement, I always sell stocks from the taxed accounts to fund living and contributing the maximum allowed to the ISA. Also reinvesting dividends within the ISA. So the tax sheltered proportion increases.

[hiriskpaul]

My wife is in the enviable position of using up all her tax-free allowance for dividends.
She is moving her shares as fast as possible into an ISA wrapper, but this will still take a few years.

She now has some bank/building-society fixed-term bonds maturing, and doesn't like the pittance they now offer as interest.
How might she reinvest the money from these bonds with a view to the returns being capital gains rather than dividends?

I am reasonably familiar with the high-yield strategy for maximising dividends.
I could suggest picking a spread of lower-yielding FTSE shares, and churning some each year to realise the right amount of capital gain, but she doesn't like to see losses if she happens to look at her portfolio at random intervals (unlike Doris who would never bother to look).

Are there other options for her?
I seem to remember something called a zero, but web searches seem to suggest they had a disaster with "split capital investment trusts" or something like that.

Rover

My initial reactions are

1) If your wife does not want to see capital losses, either don't invest in shares or get over it.
2) Don't let the tax tail wag the investment dog.

However, there are some things you can do, bearing in mind point 2 above. A highly tax efficient dividend to capital gain converter which is readily available to retail investors are Berkshire Hathaway shares. Berkshire Hathaway collects dividends, but never pays any out. Instead the company reinvests dividends or buys back its own. Note that Berkshire Hathaway is not like an accumulating ETF or OEIC in that there is no kind of event where income is considered to have been paid and so subject to income tax.

Another approach is to hold accumulating ETFs (that have UK reporting status). Each year, sell a few days before the end of the reporting period and buy back on or after the end of the reporting period. As long as you are not holding on the last day of the reporting period, you will not be charged tax on the "excess reportable income", which is a whole years worth of dividends for an accumulating ETF. For safety, buy another comparable ETF while you are out of the accumulating ETF. That way you will not suffer from unfortunate market movements between buying and selling. Furthermore, provided you swap back within 30 days you will not generate capital gains tax events as your buy back will be caught by the 30 day rule and the buy and sell of your market hedge should exactly counteract any gain/loss on the accumulating ETF. Simple example - if you hold the S&P 500 ETF CSP1, sell it before the end of the reporting period and invest in the similar income paying ETF IUSA instead. Then swap back after the end of the reporting period.

There are other financial products that turn dividends into cap gains, such as equity index futures, but my guess is these are not really what you are looking for.

You can obviously mitigate income tax on dividends by holding low yielders outside tax shelters and higher yielders inside. Another tactic is to hold anything you can claim a withholding tax credit on outside ISAs, because you will not be able to claim the tax credit inside an ISA. For example, if hold US shares outside your ISA, you can offset income tax on the dividends by the 15% dividend withholding tax. So if you are paying 7.5% dividend tax, you are no worse off holding the US shares outside your ISA than inside (potential CGT considerations aside).

Last comment is that if you are only paying 7.5% on your dividends, don't bother trying to avoid it beyond simple mitigation as in the above paragraph. The chances are that anything you do will cost you more than you save in tax (back to point 2).

[1nvest]

Index linked government bonds?

They are free of CGT, but at current prices, the returns are lower than inflation.

IF held to maturity.

The recent yield curve for instance has the 12 year 8 month priced to a -2.74% whilst the 10 year 4 month is priced to a -2.08%. All else unchanged and the price increase if the 12 year 8 month were held for 2 years 4 month would be a price appreciation of around +6% - to leave a approximate = inflation return. If inflation were to rise to say 1970/80's type double digit levels then nominal bonds/gilts, stocks, house prices etc. might all halve or more in price. And if real yields moved even more negative in reflection of high inflation the capital gains from that Index Linked Gilt could rise substantially more (total gain that exceeded inflation). If for instance after that 2 years 4 months real yields had moved to -4.8% then the price would have doubled. Holding one asset that had doubled in real terms whilst others had halved or more opens up the potential to rotate into the lower priced asset at a effective 75% discount. Or put another way a all stock investor who was -50% down might see a 67/33 stock/Index Bond investor at break-even in nominal terms, +100% ahead of the all-stock investor.

[1nvest]

Another approach is to hold accumulating ETFs (that have UK reporting status). Each year, sell a few days before the end of the reporting period and buy back on or after the end of the reporting period. As long as you are not holding on the last day of the reporting period, you will not be charged tax on the "excess reportable income", which is a whole years worth of dividends for an accumulating ETF.

I was under the assumption it was proportioned and that if you held for 99% of the year (right up to the reportable date), another held it for 1%, then their excess reportable would be the 1% and you were expected to declare the 99% share of the excess reportable total.

In awareness of HMRC penalties of 200% of any gains a incorrectly reported asset made I opted to sell the only fund I held that had such Excess Reportable Income (potential wasp nest that I didn't want to be stung by).

https://www.gov.uk/hmrc-internal-manual ... l/ofm02300

UK investors must make a return of their income to include both the actual distributions received, as well as the ‘reported income’ (i.e. their proportionate share of the fund’s reportable income in excess of the sums distributed).

So if you held for a year right up to the day before the ERI fell and sold on that holding, then you'd report a lower capital gain (minus the reportable income amount) + 99% share of the reportable income amount as 'income'. Otherwise the new holder (that bought the day prior to the ERI date) becomes liable for a tax liability that was declared from the funds income/interest activities achieved in the prior financial year when they didn't actually hold the shares during that period.

[hiriskpaul]

Another approach is to hold accumulating ETFs (that have UK reporting status). Each year, sell a few days before the end of the reporting period and buy back on or after the end of the reporting period. As long as you are not holding on the last day of the reporting period, you will not be charged tax on the "excess reportable income", which is a whole years worth of dividends for an accumulating ETF.

I was under the assumption it was proportioned and that if you held for 99% of the year (right up to the reportable date), another held it for 1%, then their excess reportable would be the 1% and you were expected to declare the 99% share of the excess reportable total.

In awareness of HMRC penalties of 200% of any gains a incorrectly reported asset made I opted to sell the only fund I held that had such Excess Reportable Income (potential wasp nest that I didn't want to be stung by).

https://www.gov.uk/hmrc-internal-manual ... l/ofm02300

UK investors must make a return of their income to include both the actual distributions received, as well as the ‘reported income’ (i.e. their proportionate share of the fund’s reportable income in excess of the sums distributed).

So if you held for a year right up to the day before the ERI fell and sold on that holding, then you'd report a lower capital gain (minus the reportable income amount) + 99% share of the reportable income amount as 'income'. Otherwise the new holder (that bought the day prior to the ERI date) becomes liable for a tax liability that was declared from the funds income/interest activities achieved in the prior financial year when they didn't actually hold the shares during that period.

My reading of this is "their proportionate share" means their proportion of the excess reportable income of the fund. That would be the number of "units" (shares in the case of ETFs) times the excess reportable income per unit. Proportionate share across time does not come into it. If it did, this would be a very odd situation as any income distributions are not treated the same way. If you buy an ETF after an XD date and sell before the next XD date, you don't pay tax on a proportion of the unreceived dividend. Instead, whoever holds the shares on the day before XD gets the whole dividend and is responsible for all the tax on it. The day after the end of the reporting period is essentially another XD date.

I can see the possibility of wriggle room here though and hope I am not wrong!

[1nvest]

I can see the possibility of wriggle room here though and hope I am not wrong!

I also originally interpreted it as being your share proportion of the fund and that a practice of yearly swapping out prior to the December (in the case of the fund I was using) ERI pay date to avoid having to declare that income whilst partaking of (most of) the capital gains a appropriate strategy at the time. But then later wasn't 100% sure, and upon also seeing a 200% of all gains HMRC penalty for any incorrect ERI reporting by me - that was enough to put me off (along with another clause that stated if a reporting fund failed to be registered as a reporting fund at any time during a holding period then the gains for the entire holding period became liable as income tax).