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Dividend and capital gains tax on passive tracker accumulators – ways to make it easier?
CGT/Dividend Tax Obsessive
Posted: 04 April 2018 14:00:02(UTC)
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Hi all,

I’m trying to get a feel about how best to manage the tax around passive tracker accumulators, like the Vanguard Developed Countries Ex-UK index.

So far I’ve kept my investments wrapped up in an ISA, but I’d expect soon that the amount I’ll put in will exceed my and my partner’s ISA allowance – so I’m trying to think about how to be smart about tax in advance.

At the moment I use my personal allowance and dividend allowance on other things – so I’d be paying tax on the dividends at 7.5% up until the higher rate.

I don’t generally have any Capital Gains at all, so I’m essentially wasting my Capital Gain allowance every year.

Reading around, it seems like people use tax certificates provided by the platform to divvy their return up between dividend and capital growth.

I’ve also seen reference to the idea of selling and instantaneously buying an amount equal to the capital gain allowance, once a year, to make use of that rather than waiting right until you cash out with multiple years of capital growth. I’d imagine this would incur some bid/offer or other fees. And you’d then also have to keep track of what was dividend, what was Capital Gain that had been covered by the annual sell/buy, and what was left over and open to tax, as well as correctly adding/deducting selling costs. I’d also have to be able to keep a record of what exactly I’ve sold and rebought so as to ‘reset’ the calculation for the next year. And I’d also need to selectively sell the positions that had actually made capital gains. If I was being really clever I could think about whether I wanted gains in dividends or capital gains in any given year....

This all seems horribly complicated!

All I really want to do is stick a bit of extra money beyond my ISA allowance into a passive fund, and do sensible things with avoiding and keeping track of the tax. Is that so rare?

Does anyone have any tips on making this easier? Is there something I’m missing? This all feels very ‘automateable’.

My plan is to set this up to run for several years, so want to make sure I’m tax planning as well as I can from the start.
Mr Helpful
Posted: 04 April 2018 14:21:06(UTC)
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CGT/Dividend Tax Obsessive;60119 wrote:
This all seems horribly complicated!
All I really want to do is stick a bit of extra money beyond my ISA allowance into a passive fund, and do sensible things with avoiding and keeping track of the tax. Is that so rare?
Does anyone have any tips on making this easier?

Use distributing fund such as VWRL?
Near enough match?
Tim D
Posted: 04 April 2018 15:11:12(UTC)
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IMHO the single most important thing you can do to make your out-of-tax-wrapper investing tax accounting simpler is to avoid accumulation units like the plague and buy income units instead (and that Vanguard Developed Countries Ex-UK index fund you mention does have income units available).

If you reinvest the income using whatever mechanisms your platform of choice provides for doing so, you'll have to keep track of the updated "book cost" of the holding. The more infrequently you reinvest, the less work it is, but of course the longer you sit on the dividends as uninvested cash the less time its working for you.

I note you didn't mention anything about a SIPP or other pension investment savings... if you're maxing out ISAs don't overlook SIPPs (pensions) as another tax-shelter avoiding a lot of this tax complication (they have their own set of complications instead... but CGT isn't one of them).
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Mr Helpful on 04/04/2018(UTC)
Alan Selwood
Posted: 04 April 2018 15:32:19(UTC)
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CGT/Dividend Tax Obsessive;60119 wrote:
Hi all,

I’m trying to get a feel about how best to manage the tax around passive tracker accumulators, like the Vanguard Developed Countries Ex-UK index....
... I’ve also seen reference to the idea of selling and instantaneously buying an amount equal to the capital gain allowance, once a year, to make use of that rather than waiting right until you cash out with multiple years of capital growth. I’d imagine this would incur some bid/offer or other fees. And you’d then also have to keep track of what was dividend, what was Capital Gain that had been covered by the annual sell/buy, and what was left over and open to tax, as well as correctly adding/deducting selling costs. I’d also have to be able to keep a record of what exactly I’ve sold and rebought so as to ‘reset’ the calculation for the next year...
... Does anyone have any tips on making this easier? Is there something I’m missing? This all feels very ‘automateable’.
My plan is to set this up to run for several years, so want to make sure I’m tax planning as well as I can from the start.


If you the investor sell an asset that is chargeable to CGT (e.g. shares in a non-ISA, non-SIPP portfolio) and instantly rebuy other than via ISA or SIPP, you fall foul of the current CGT calculations rules, and do not, for CGT purposes, crystallise the gain. (You used to be able to do this, but the rules changed about 20 years ago to stop what was then referred to as 'bed-and'breakfasting').

For a detailed explanation see:
https://www.fool.co.uk/i...t-share-matching-rules/

To overcome the CGT problem above, people often sell a holding in their non-ISA, non-SIPP account, then buy it back within ISA or SIPP. (I expect to do this over the next few days myself).

It is always possible for a spouse to give the cash to the other spouse with which to buy back a sold holding in the other name ('bed-and-spouse'?), but
if unmarried, beware of the extra complication of gifts between non-spouses!!

Simply selling and immediately buying back by the same owner does not work!


4 users thanked Alan Selwood for this post.
Tim D on 04/04/2018(UTC), Jim S on 04/04/2018(UTC), Guest on 04/04/2018(UTC), Mike L on 04/04/2018(UTC)
Jim S
Posted: 04 April 2018 15:52:56(UTC)
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I think one approach is to sell and then buy back (assuming outside ISA/SIPP) at least 31 days later.

Another approach might be to buy something slightly different, maybe a different class of fund, or a different ETF which tracks a similar index. That way you can buy without the wait.

Into wrapper is often the best way, ie. selling outside ISA/SIPP, then transferring cash to ISA/SIPP, then buying againin the wrapper, is another way
Julianw
Posted: 04 April 2018 17:23:58(UTC)
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I would definitely stick to income units.

Since a global index fund has yield about 2.3%. As a basic rate tax payer subject to dividend tax rate of 7.5%. That means a drag of 2.3*0.075= 0.17% a year. Not tragic.

To get around the 31day rule.

You can alternate between FTSE all world ETF one year and
FTSE 89% developed world and 11% emerging market the next year.

Go directly to Vanguard.co.uk will probably be a good option.

Tony Peterson
Posted: 04 April 2018 17:32:42(UTC)
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Once again, it seems to me that the OP may think that there are CGT implications for investments that have just grown in value.

Capital gains tax is only relevant when you cash a profitable investment in.

Alan Selwood
Posted: 04 April 2018 21:32:00(UTC)
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Exactly, Tony. There are many misconceptions about how taxation works.

People need to be prepared to read up on the rules.

One very good thing about the internet is that with a little bit of thought, it is possible to find out almost ANYTHING about anything.

UK taxpayers should start with the gov.uk website so as to get the answers 'from the horse's mouth', then if it all seems too obscure, do a search based on the key words, and see how other websites explain things.
CGT/Dividend Tax Obsessive
Posted: 05 April 2018 17:02:19(UTC)
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Hi all,

Thanks for the thoughtful responses.

Yup, I’m aware that CGT is payable only when the gain is crystallised on sale, not throughout the life of the investment.

Thanks also for the information on the anti-‘bed and breakfasting’ rules. The idea of using the annual non-ISA to ISA transfer and the other ways to get around this seems really smart.

Am I right that main effect of using income instead of accumulation units is that the dividends by definition will just pop straight into an account and therefore everything else will just be capital gain? I’m not really familiar with reinvesting income units ‘manually’ – is the bid/offer cost or other fee more significant than the experience with accumulators where it’s automatically re-invested?
Jim S
Posted: 05 April 2018 17:22:46(UTC)
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CGT/Dividend Tax Obsessive;60197 wrote:
Hi all,

Am I right that main effect of using income instead of accumulation units is that the dividends by definition will just pop straight into an account and therefore everything else will just be capital gain? I’m not really familiar with reinvesting income units ‘manually’ – is the bid/offer cost or other fee more significant than the experience with accumulators where it’s automatically re-invested?


The main headache with reinvesting dividends is that you lose track of what the investment cost because you gradually get more of the same thing with different purchase prices. So if you ever need to calculate CGT, that becomes a pain to work out.

Eg, if you buy shares in WidgetsRUs for 100p, then you get 4p divident for the next 10 years which you reivest annually for the next 10 years as the SP fluctuates, you end up with 11 different purchase prices for your WidgetsRUs shares. Lets say you sell half and it takes you over the CGT allowance, it gets a bit messy to report. Reinvesting divis from a fund gives a similar outcome.

For funds, I think if you have accumulation units they just count as capital growth (which is fine), if you have income funds you can count that as income (which is fine too), but getting income and then reinvesting it in the same fund is maybe something to try and avoid (except inside a SIPP/ISA tax shelter where CGT is not a worry).

This is just my take on it though, I might be misunderstanding
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Tony Peterson on 06/04/2018(UTC)
Tim D
Posted: 06 April 2018 15:11:38(UTC)
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Jim S;60200 wrote:
For funds, I think if you have accumulation units they just count as capital growth


No, this is a common misconception... see http://monevator.com/inc...x-on-accumulation-unit/ or http://monevator.com/inc...ation-units-difference/ for an explanation.

As you point out in your WidgetsRUs example, it is pretty complicated keeping track of reinvestment... but IMHO that's still simpler and clearer and more transparent than dealing with accumulation units where it's far more opaque what's happening.
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Jim S on 06/04/2018(UTC)
Jim S
Posted: 06 April 2018 16:16:45(UTC)
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Ouch, I stand corrected Tim!

Luckily I always leave some headroom with my CGT allowance so its never been an issue for me. This seems like a nightmare to manage.

So outside a tax wrapper, this means its normally best to go for income units and just take the income, not reinvest in the same thing.

Tony Peterson
Posted: 06 April 2018 16:32:39(UTC)
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Automatic reinvestment of dividends in the company providing the dividends can lead to tax return nightmares.( And it is a sub-optimal strategy anyway. Every dividend we get now is invested only in the best bargain of the day.)

I know from bitter experience. Last century.

As it stands, having done most of our profit taking and dividend reinvestment within ISAs our tax returns (through the door today - no flies on HMRC) will be posted off tomorrow. Out-of-ISA I see it as important to use up as much of the annual allowance as possible.







3 users thanked Tony Peterson for this post.
CGT/Dividend Tax Obsessive on 06/04/2018(UTC), Tim D on 06/04/2018(UTC), J Thomas on 06/04/2018(UTC)
CGT/Dividend Tax Obsessive
Posted: 06 April 2018 16:51:32(UTC)
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Thanks very much for all this guys, very helpful.

Seems like there’s no clever way to avoid the tax – it’s just whether to administrate with income units or accumulators... and the former is probably a little easier.

Next question – my current investments are in an ISA wrapper so I can’t see what the dividend/capital gain split would be in any case. Is there any tool I can use that would give me a sense of what these numbers would actually have been for the year, when the dividends were paid etc? It’d be useful for me to look at a solid example of how I’d have made this work – particularly around deliberately using my capital gain allowance.
Tim D
Posted: 06 April 2018 16:59:24(UTC)
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Jim S;60255 wrote:
Luckily I always leave some headroom with my CGT allowance so its never been an issue for me. This seems like a nightmare to manage.


If anything, the risk is that someone who didn't understand how it works would end up paying both income tax (because the income retained within the units will be on the consolidated tax certificate from your platform, and you'd probably just dutifully copy into the self-assessment) and tax on more of a gain than they needed to (because the retained income should have been used to increase the notional "book cost" against which an eventual sale is compared to determine the gain).

Jim S;60255 wrote:
So outside a tax wrapper, this means its normally best to go for income units and just take the income, not reinvest in the same thing.


Personally, for my out-of-ISA/SIPP stuff I'm happy to let cash accumulate for a while and then maybe once a year or so I might use it top up some existing holdings (good chance to rebalance, nudge asset allocation etc... something which'd be harder to do with a portfolio entirely of accumulation units). There's no getting away from needing to keep track of how much in total you've sunk into each holding though. But that's simpler the less often you do it.
Tim D
Posted: 06 April 2018 17:09:07(UTC)
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CGT/Dividend Tax Obsessive;60258 wrote:

Seems like there’s no clever way to avoid the tax – it’s just whether to administrate with income units or accumulators... and the former is probably a little easier.


If you have a situation where it'd be useful to effectively convert dividend income into capital gains, I understand zero dividend preference shares are considered useful. Don't know much more about them than that.

CGT/Dividend Tax Obsessive;60258 wrote:
Next question – my current investments are in an ISA wrapper so I can’t see what the dividend/capital gain split would be in any case. Is there any tool I can use that would give me a sense of what these numbers would actually have been for the year, when the dividends were paid etc? It’d be useful for me to look at a solid example of how I’d have made this work – particularly around deliberately using my capital gain allowance.


Trustnet maybe? Even Acc units have a "Dividends" tab listing the income reinvested (make sure you pick the right unit class I/R/X etc... they will pay different amounts). Trustnet's charting also might be useful for getting a more qualitative feel... you can chart both the Inc and Acc units against each other (or chart the Inc units and change the chart basis between with and without reinvestment).
Tony Peterson
Posted: 06 April 2018 18:45:48(UTC)
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Investments within an ISA wrapper are of no interest to tax authorities. You only need to keep records to keep yourself happy.

Stuff accruing income and gains in an ISA ( even when realised ) are not liable to any tax.

Until someone changes the rules.
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