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tax payable on investments
Saltyrob
Posted: 19 November 2012 21:01:14(UTC)
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Joined: 10/11/2012(UTC)
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Hi,

I have touched on this in a previous post but would appreciate clarification.If money is invested in a unit trust or investment trust and the dividend reinvested as part of a DRP plan,is no income tax on the dividend payable. Also if part or all of the investment is sold and the profit is less than the individual annual exemption of £10600, no capital gains tax is payable.This is information will be useful in checking whether it is worth my son keeping an investment in an ISA .

Many thanks and I am sorry if its a bit of a basic question

Saltyrob

P L
Posted: 20 November 2012 08:36:03(UTC)
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When holding funds (OEIC,ITs, Shares) inside an ISA or SIPP there is no CGT or income tax to pay at all. In reality it means no additional income tax to pay given the Company has already paid the tax as part of the Corporation tax regime which costs as already paying lower rate tax.

However if you hold funds/shares outside of the tax free wrapper then potentially there is CGT and/or additional income tax payable depending on the gain and your income level. If you are still a basic rate tax payer (having taken all income including dividends into account) then there is no further income tax to pay, if not then there is. Whether taking the income or reinvesting it, or whether you hold funds as accumulation or income units, extra income tax is due if you are a higher rate tax payer.

Generally an ISA wrapper doesn't do a great deal for a basic rate tax payers when it comes to investments rather than pure cash savings as far as the income is concerned. Unit trusts/OEIC/ITs are actually quite tax efficient in their own right.

The main benefit is in avoiding CGT which given it cannot be rolled over or accumulated year on year potentially is quite valuable if holding onto an investment for many years. A small initial investment could easy exceed the CGT limit after say 20 years.

Investments held outside a tax free wrapper would need to be sold and something new purchased (or wait for 30 days to repurchase) to establish a new cost basis when the gains get near to the CGT level. Apart from the added transaction costs there is always the risk that the CGT level may change. It also means switching investments for rebalancing, modifying risk level or simply finding better funds is potentially made more difficult given the timing may not always be right.

There is no disavantage to using an ISA over not using one even if it has to be sold, given again you only get the opportunity once a year. Also if you have an ISA then it should never be stopped, unless you need the mone, as you are wasting a potentially valuable tax shelter in years to come
4 users thanked P L for this post.
normski 2nd on 20/11/2012(UTC), New Investor on 20/11/2012(UTC), Powerful Pierre on 20/11/2012(UTC), Colin Ryder on 21/11/2012(UTC)
TJL
Posted: 20 November 2012 09:30:57(UTC)
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Hello P L,
If you end up selling units which are not in an Isa and need to calculate CGT, it is not always as straightforward as it seems, especially if you have invested in instalments.
E.g. if you invested £10,000 and were lucky enough for it to grow to £20,000, you do not necessarily declare £10,000 profit.
You total up the number of units you have bought and the total cost and then divide one by the other to get the average price.
Then, you multiply the number of units sold by the average price which gives you the cost of the units sold.
The difference between the cost of the units sold and the value of the amount sold is the amount to be declared.
To put this into perspective, I recently took £2000 profit from a fund, but the amount of profit to be declared (using the above calculation) was only £835.
It could get quite complicated if there are incremental sales or profit taking, combined with many instalments and numerous re-invested dividends to calculate - having full records and being able to use a spreadsheet (or having an accountant or tax advisor!) obviously helps.
If you are nowhere near the CGT threshold it doesn't really matter, but if you think you are near it or over it, it obviously does.
I hope I have explained this correctly (and clearly).
2 users thanked TJL for this post.
normski 2nd on 20/11/2012(UTC), Colin Ryder on 21/11/2012(UTC)
normski 2nd
Posted: 20 November 2012 16:25:15(UTC)
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Good afternoon Sllytrob,

I wish I had isas fron the very begining . A very good way to save in the long term.


normski
Linda Green
Posted: 20 November 2012 17:22:06(UTC)
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It is worth noting that income from ISAs is ignored when applying for student finance and doesn't need to be entered on the student finance application form.

Also it doesn't need to be entered on your tax return, so saves a lot of fuss and trouble.
Dividend Income investor.com
Posted: 20 November 2012 17:29:47(UTC)
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We are big fans of both stocks and shares ISAs and Junior ISA's!
The latter is even better, as you have an additional 18 years to compound your returns.

Why?

Have a read at: http://dividend-income-investor.com/junior-isas/
David Chapman
Posted: 20 November 2012 19:48:37(UTC)
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Another point to consider is the fact that that when you invest in an ISA you are moving your money into a tax free environment - I agree that it doesn't help with ordinary share investment - BUT - when you need tax free income when you retire you can shift the lot into bond investments where the income tax CAN be reclaimed - If you have filled your ISAs over the years then a considerable tax free income can be achieved - I know - I have done so - So something to consider !!
2 users thanked David Chapman for this post.
Guest on 20/11/2012(UTC), Powerful Pierre on 20/11/2012(UTC)
douglas gordon
Posted: 21 November 2012 01:03:40(UTC)
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David Chapman makes a good point – I also hold mainly bond funds within my ISA which saves me a lot of tax. Check the type of income paid by investments – DIVIDENDS or INTEREST. Dividends are paid with a notional 10% tax credit. Basic rate tax payers pay no further tax when held outside an ISA; however this 10% cannot be reclaimed even when the investment is held within an ISA, but investments paying interest are tax free within an ISA. If you have more investments than your ISA allowance and these are a mixture of dividend and interest, then make sure that your INTEREST paying ones are held within the tax shelter and the DIVIDEND ones are outside. This can have a significant effect as interest is taxed at a higher rate and can all be reclaimed. I'm not a tax expert but my understanding is that this interest / dividend rule applies to all investments, not just funds, except Preference Share income which is paid on a fixed coupon but is treated like ordinary shares (dividend).
Brian Richards
Posted: 21 November 2012 10:54:32(UTC)
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The qualifying requirement is 60% interest paying securities,ie in a strategic bond fund that may have an equity component, eg Invesco Monthly income Plus.
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David Chapman on 21/11/2012(UTC)
David Chapman
Posted: 21 November 2012 12:43:00(UTC)
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Brian Richards is right - I have invested in
Invesco Monthly income plus
Invesco Distribution
Investec Monlthly high Yield
amongst others - these investments are within my ISAs and give me a tax free yield of 6% + not bad in todays low interest climate - You have to accept however that the fund values will fluctuate.
Additionally you can save on both initial and continuing fund charges if you invest via a platform:-
Eg - Cofunds via Chartwell or Vantage via Hargreaves Landsdown
Clive B
Posted: 21 November 2012 13:45:30(UTC)
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@ TJL

re CGT, I agree with you on calculating the cost of the units you're selling, but disagree that you have to do the same with regard to the proceeds

see http://www.hmrc.gov.uk/cgt/shares/find-cost.htm#2

Way I do it is
-let's say I have 10,000 units, they cost £20,000 total (could have been bought in one purchase, or many purchases)
-I sell 2000 for £5000
-sale proceeds are £5000
-cost of those 2000 units was (2000/10000) x £20,000 i.e. £4000
-hence profit £1000
TJL
Posted: 21 November 2012 14:34:13(UTC)
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Hi Clive B,
I think the result is the same either way ?
I've re-done one of my recent calculations doing it the way you suggest, and I get the same answer as I did originally.
TJL
Clive B
Posted: 21 November 2012 15:43:51(UTC)
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TJL

Yes, I think it is. I should have read your entry more carefully, sorry.

Clive
TJL
Posted: 21 November 2012 16:13:42(UTC)
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No apology necessary, it's confusing at the best of times!
Regards
TJL
Saltyrob
Posted: 21 November 2012 18:25:50(UTC)
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Joined: 10/11/2012(UTC)
Posts: 5

Many thanks for replies and much to think about.

My son will be investing only a small sum monthly, to get going and the min £45-60 year to keep it in an ISA will almost be one months contribution. So I have thought about initially buying outside an ISA and transferring it into an ISA when the value of the investment becames larger.

Saltyrob
D O'Callaghan
Posted: 22 November 2012 11:09:51(UTC)
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Douglas Gordon said,
"Dividends are paid with a notional 10% tax credit. Basic rate tax payers pay no further tax when held outside an ISA; however this 10% cannot be reclaimed even when the investment is held within an ISA, but investments paying interest are tax free within an ISA."
But is it not possible for a non-taxpayer to reclaim this 10%, and if so, is this done via tax return?
D O'Callaghan
Posted: 22 November 2012 11:12:24(UTC)
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To clarify - I mean is it not possible for a non-taxpayer to reclaim the 10% on dividends that are not within ISA wrapper?
Clive B
Posted: 24 November 2012 10:31:18(UTC)
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D O'Callaghan

You might want to take a look at this on the HMRC site, gives some info - though I couldn't find a simple answer to your question (and I pay tax, so don't know the answer from personal experience)

http://www.hmrc.gov.uk/i...uals/savings-income.htm

Simplest way might be to ring HMRC
D O'Callaghan
Posted: 24 November 2012 15:22:48(UTC)
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Thanks Clive.
I am a taxpayer but my wife is not (both pensioners) so I was wondering if better to have dividend income in her name and reclaim tax on it.
But I've now found that you can't do this. See http://www.hmrc.gov.uk/taxon/uk.htm
"Can you claim the tax credit if you don't normally pay tax?
No. You can't claim the 10 per cent tax credit, even if your taxable income is less than your Personal Allowance and you don't pay tax. This is because Income Tax hasn't been deducted from the dividend paid to you - you have simply been given a 10 per cent credit against any Income Tax due."
DO'C
1 user thanked D O'Callaghan for this post.
Clive B on 24/11/2012(UTC)
TJL
Posted: 24 November 2012 16:46:12(UTC)
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Apologies if this point has already been made, but I believe the 10% is claimed back on your behalf by the fund manager if you are invested in a bond fund in an Isa?
If this is of interest to you it might be worth looking into what a 'bond' fund is exactly - I think it means a fund which is 80% invested in fixed interest (so can be 20% equities), but this is off the top off my head and I haven't checked.
Regards.
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