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Tax Treatment of Investment Trusts

yieldhog
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Tax Treatment of Investment Trusts

#375823

Postby yieldhog » January 11th, 2021, 12:18 pm

I'm retired and receive part of my income from a SIPP which is partly invested in a number of Investment Trusts (ITs).
Some of the ITs are invested in bonds and some in equities or a combination of each.
Tax treatment of the SIPP is straightforward, money wthdrawn is treated as income and accumulation within the SIPP is free of tax.
I lived overseas until a few years ago and have not held any taxable UK brokerage accounts for many years, but that may soon change as I have sold some properties and will have some funds to invest.
I will probably invest in a selection of ITs that generate income and/or capital gains. Before I invest. I need to understand how the dividends from ITs are treated for UK tax purposes
For example, if I invest in an IT that holds a range of investments such as equities, bonds, preference shares etc. , is the dividend from such an IT broken down into seperate elements (such as portfolio dividend income, capital gains, bond interest, return of capital etc.) or is it just reportable on my tax return as dividend income?
Take for example an IT that does not pay dividends but instead invests to generate capital gains. Could I just keep holding that for as long as I like before selling and taking the capital gain (or loss) at a time that suited my tax position? Or is there some sort of periodic mark-to-market that would force me to declare a capital gain?
Y

Spet0789
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Re: Tax Treatment of Investment Trusts

#375826

Postby Spet0789 » January 11th, 2021, 12:25 pm

U.K. listed investment trust behave as you would expect for tax purposes.

Their dividends are treated in the same way as dividends in normal operating companies. Similarly, a capital gain is only crystallised when the shares are sold and the tax liability is calculated in the same way as it would be for any other company. Thus, ITs have the advantage that they can alter their positions without creating a tax liability for the underlying investors. So in the case you mention, the IT can be actively trading its underlying portfolio and reinvesting any gains or income but no gain is crystallised as long as you don’t sell.

The only caveat to this is REITs, for which some of all of their ‘dividend’ (the PID) is treated differently if outside a sheltered account. DYOR.

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Re: Tax Treatment of Investment Trusts

#375834

Postby fisher » January 11th, 2021, 12:47 pm

You can currently receive up to £2,000 in dividends tax free.

In addition you can use an ISA and invest up to £20,000 in shares (including ITs) and these are outside the tax system and so all capital gains and dividends for shares in an ISA are tax free.

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Re: Tax Treatment of Investment Trusts

#375852

Postby GrahamPlatt » January 11th, 2021, 1:50 pm

fisher wrote:You can currently receive up to £2,000 in dividends tax free.

In addition you can use an ISA and invest up to £20,000 per year in shares (including ITs) and these are outside the tax system and so all capital gains and dividends for shares in an ISA are tax free.

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Re: Tax Treatment of Investment Trusts

#375863

Postby Laughton » January 11th, 2021, 2:23 pm

Tax treatment of dividends paid by IT's is the same as for any other listed company (that's what they are). No, the IT does not split up where the dividends come from (eg, bond income, overseas company dividends, Pref share dividends, etc.). You are getting the dividends from the IT.

Regarding IT's that you might purchase to generate capital gains rather than dividend income. The only figures you need to worry about, currently, are the price you pay when you buy and the price you get when you sell. You could buy a lot and sell in tranches each year to take advantage of any capital gain and the annual tax free capital gains allowance.

When you return take advantage of ISA allowance - no, income tax, no capital gains tax and no requirement to declare anything regarding holdings in these on your tax return.

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Re: Tax Treatment of Investment Trusts

#375873

Postby Alaric » January 11th, 2021, 2:46 pm

Spet0789 wrote:Their dividends are treated in the same way as dividends in normal operating companies


I think there's the occasional exception where the underlying investments are fixed interest and loans.

I believe this IT operates in this manner and deep in the prospectus, it makes this declaration.

An investment trust approved under sections 1158 to 1159 of the CTA 2010, or one that intends to seek such approval, is able to elect to take advantage of modified UK tax treatment in respect of its ‘‘qualifying interest income’’ for an accounting period (referred to here as the ‘‘streaming’’regime). Under regulations made pursuant to the Finance Act 2009, the Company may, if it so chooses, designate as an ‘‘interest distribution’’ all or part of the amount it distributes to Shareholders as dividends in respect of the accounting period, to the extent that it has ‘‘qualifying interest income’’ for the accounting period. Were the Company to designate any dividend it pays in this manner, it would be able to deduct such interest distributions from its taxable interest income in calculating its taxable profit for the relevant accounting period.

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Re: Tax Treatment of Investment Trusts

#375951

Postby Markab01 » January 11th, 2021, 5:08 pm

Alaric wrote:
Spet0789 wrote:Their dividends are treated in the same way as dividends in normal operating companies


I think there's the occasional exception where the underlying investments are fixed interest and loans.

I believe this IT operates in this manner and deep in the prospectus, it makes this declaration.

An investment trust approved under sections 1158 to 1159 of the CTA 2010, or one that intends to seek such approval, is able to elect to take advantage of modified UK tax treatment in respect of its ‘‘qualifying interest income’’ for an accounting period (referred to here as the ‘‘streaming’’regime). Under regulations made pursuant to the Finance Act 2009, the Company may, if it so chooses, designate as an ‘‘interest distribution’’ all or part of the amount it distributes to Shareholders as dividends in respect of the accounting period, to the extent that it has ‘‘qualifying interest income’’ for the accounting period. Were the Company to designate any dividend it pays in this manner, it would be able to deduct such interest distributions from its taxable interest income in calculating its taxable profit for the relevant accounting period.


One exception that I can think of is Henderson Diversified Income (HDIV) where the income payment is classed as interest and hence separate from normal dividend payments on my other IT's

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Re: Tax Treatment of Investment Trusts

#376000

Postby XFool » January 11th, 2021, 6:40 pm

Alaric wrote:
Spet0789 wrote:Their dividends are treated in the same way as dividends in normal operating companies

I think there's the occasional exception where the underlying investments are fixed interest and loans.

I believe this IT operates in this manner and deep in the prospectus, it makes this declaration.

An investment trust approved under sections 1158 to 1159 of the CTA 2010, or one that intends to seek such approval, is able to elect to take advantage of modified UK tax treatment in respect of its ‘‘qualifying interest income’’ for an accounting period (referred to here as the ‘‘streaming’’regime). Under regulations made pursuant to the Finance Act 2009, the Company may, if it so chooses, designate as an ‘‘interest distribution’’ all or part of the amount it distributes to Shareholders as dividends in respect of the accounting period, to the extent that it has ‘‘qualifying interest income’’ for the accounting period. Were the Company to designate any dividend it pays in this manner, it would be able to deduct such interest distributions from its taxable interest income in calculating its taxable profit for the relevant accounting period.

But, from the sound of that, it applies to the operations of the IT itself and its tax calculations. Would this have any immediate relevance to the tax affairs of an investor in the IT? Which IT is it?

"1158 to 1159 of the CTA 2010, or one that intends to seek such approval" Simply refers to what is meant by "Investment Trust".
Last edited by XFool on January 11th, 2021, 6:52 pm, edited 1 time in total.

yieldhog
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Re: Tax Treatment of Investment Trusts

#376002

Postby yieldhog » January 11th, 2021, 6:42 pm

Thank you for all the replies so far. Clearly a lot of homework to do before going the ISA route.
One dilemma I have is between keeping things simple and making the most of sensible tax-efficient opportunities.
My life expectancy is limited and so I need to bear in mind that my wife will inherit everything within the next few years and I don't want to leave her with too many accounts to manage. On the other hand, I try not to put too many eggs in one basket.
My current SIPP is with EQi and I also have an unused brokerage account with them, but I'm somewhat hesitant to put another large chunk of our savings into the same company even though it would keep administration to a minimum.
Y

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Re: Tax Treatment of Investment Trusts

#376060

Postby Laughton » January 11th, 2021, 10:20 pm

In that case you definitely want to look into ISAs.

My memory could be failing but there was talk of being able to transfer ISA in total to surviving spouse without need for sale of holdings and the surviving spouse retains all benefits of the holdings being in, what would then be, their ISA. You couldn't get much simpler than that.

Did it actually become law - or am I just imagining it?

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Re: Tax Treatment of Investment Trusts

#376070

Postby AJC5001 » January 11th, 2021, 10:52 pm

Laughton wrote:My memory could be failing but there was talk of being able to transfer ISA in total to surviving spouse without need for sale of holdings and the surviving spouse retains all benefits of the holdings being in, what would then be, their ISA. You couldn't get much simpler than that.

Did it actually become law - or am I just imagining it?


No, you didn't imagine it. :)

HL have a description here https://www.hl.co.uk/investment-services/isa/additional-permitted-subscription-aps

Adrian

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Re: Tax Treatment of Investment Trusts

#376075

Postby Dod101 » January 11th, 2021, 11:19 pm

If I were the OP I would not be too concerned with the outliers (because that is what they are) Most ITs that he is going to be investing in will distribute income as ordinary dividends just like any other company. These will be subject to dividend tax according to the usual personal tax rules. If of course the IT is held in an ISA, the dividends are tax free as has been said and do not need to be declared on a tax return.

Capital gains within the IT are tax free for the IT, which is a major benefit. The quid pro quo is that the IT is required to distribute at least 85% of its investment income to qualify as an IT. Upon selling the shares of an IT there may be a capital gain or a capital loss and these gains or losses are treated in just the same way as any other gain or loss. Again if held in an ISA, the tax (either way) should be ignored.

The OP can invest £20,000 per tax year and so can his wife so at the moment he and his wife could invest £40,000 and then after 5 April repeat the investment, so over the next few months he and his wife can between them invest a total of £80,000.

All of this of course assumes that by ''Tax treatment of Investment Trusts'', the OP is really looking for guidance on the tax treatment of gains by a personal investor from Investment Trusts. Not the same thing. Sorry if that sounds pedantic.

Dod

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Re: Tax Treatment of Investment Trusts

#376199

Postby yieldhog » January 12th, 2021, 11:43 am

Dod,
Yes, that is what I was looking for i.e. guidance on the tax treatment of gains by a personal investor from Investment Trusts.

It would also be helpful if regular ISA investors could mention their experieces dealing with the main providers of online equity ISAs. The main things I would look for in a provider are:
1. Safety, reliability and competence of the provider.
2. Ease of using the online platform for buying/selling/monitoring a portfolio of stocks/bonds/ITs etc.
3. Good portfolio management tools and research capabilities.
4. Competitive and transparent fees structure.
5. Competitive and competent dealers.
My current SIPP provider, EQi, is not too bad but has not been without issues. However, I appreciate there will be issues with most, if not all, providers.
I use the free services of Hargreaves Lansdown for much of my research and will consider them for an ISA. Interactive Investors is another provider that seems to get a lot of mentions.
The EQi portfolio management tools are okay, but it would be good to get some features that I used to get on my overseas portfolios e.g. daily gain/loss on individual positions, monthly breakdown of dividend projections, easy comparison of holdings including historical data etc. Maybe I just havn't explored EQi's site enough to find everything it offers.

Y

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Re: Tax Treatment of Investment Trusts

#376205

Postby Dod101 » January 12th, 2021, 12:00 pm

yieldhog wrote:Dod,
Yes, that is what I was looking for i.e. guidance on the tax treatment of gains by a personal investor from Investment Trusts.

It would also be helpful if regular ISA investors could mention their experieces dealing with the main providers of online equity ISAs. The main things I would look for in a provider are:
1. Safety, reliability and competence of the provider.
2. Ease of using the online platform for buying/selling/monitoring a portfolio of stocks/bonds/ITs etc.
3. Good portfolio management tools and research capabilities.
4. Competitive and transparent fees structure.
5. Competitive and competent dealers.
My current SIPP provider, EQi, is not too bad but has not been without issues. However, I appreciate there will be issues with most, if not all, providers.
I use the free services of Hargreaves Lansdown for much of my research and will consider them for an ISA. Interactive Investors is another provider that seems to get a lot of mentions.
The EQi portfolio management tools are okay, but it would be good to get some features that I used to get on my overseas portfolios e.g. daily gain/loss on individual positions, monthly breakdown of dividend projections, easy comparison of holdings including historical data etc. Maybe I just havn't explored EQi's site enough to find everything it offers.

Y

I would be a little wary of any platform that charges fees on an ad valorem basis Flat fees are the way to go if you anticipate any sort of sizeable holding. Interactive Investors for instance and |I think AJ Bell. I use II and have had no issues with them but look around. Several platforms from Lloyds Bank get a good name but I have no experience of them. As you have indicated your point 1 is fundamental and by far the most important issue. None can be guaranteed in that sense but the bigger and better known ones should hopefully be fine. Obviously your investments are required to be ring fenced so that in the event of a platform being insolvent your assets should be OK but there might well be a delay in accessing them.

Others will have more to add. I use as I said II and also HSBC but I would not recommend them as a good platform provider. I use them because of what I hope is very good security and my assets are split pretty much 50/50 between II and HSBC.

Dod

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Re: Tax Treatment of Investment Trusts

#376207

Postby Alaric » January 12th, 2021, 12:03 pm

yieldhog wrote:The main things I would look for in a provider are:
1. Safety, reliability and competence of the provider.
2. Ease of using the online platform for buying/selling/monitoring a portfolio of stocks/bonds/ITs etc.
3. Good portfolio management tools and research capabilities.
4. Competitive and transparent fees structure.
5. Competitive and competent dealers.
My current SIPP provider, EQi, is not too bad but has not been without issues. However, I appreciate there will be issues with most, if not all, providers.


As a generic opinion, if they can deliver 1., they deliver the other four as well.although opinions may vary on some niche services. The "Brokers and Share Dealing" Board can be a place to look for horror stories and thus providers to avoid.

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Re: Tax Treatment of Investment Trusts

#376235

Postby scrumpyjack » January 12th, 2021, 1:28 pm

AJC5001 wrote:
Laughton wrote:My memory could be failing but there was talk of being able to transfer ISA in total to surviving spouse without need for sale of holdings and the surviving spouse retains all benefits of the holdings being in, what would then be, their ISA. You couldn't get much simpler than that.

Did it actually become law - or am I just imagining it?


No, you didn't imagine it. :)

HL have a description here https://www.hl.co.uk/investment-services/isa/additional-permitted-subscription-aps

Adrian


It is worth noting that the ISA can carry on in the estate for up to 3 years with no tax on the dividends and no capital gains tax, irrespective of whether it is being left to a spouse/civil partner etc. In some circumstances it may be worth not being too eager to complete estate administration too quickly.

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Re: Tax Treatment of Investment Trusts

#376653

Postby Charlottesquare » January 13th, 2021, 4:21 pm

scrumpyjack wrote:
AJC5001 wrote:
Laughton wrote:My memory could be failing but there was talk of being able to transfer ISA in total to surviving spouse without need for sale of holdings and the surviving spouse retains all benefits of the holdings being in, what would then be, their ISA. You couldn't get much simpler than that.

Did it actually become law - or am I just imagining it?


No, you didn't imagine it. :)

HL have a description here https://www.hl.co.uk/investment-services/isa/additional-permitted-subscription-aps

Adrian


It is worth noting that the ISA can carry on in the estate for up to 3 years with no tax on the dividends and no capital gains tax, irrespective of whether it is being left to a spouse/civil partner etc. In some circumstances it may be worth not being too eager to complete estate administration too quickly.


I thought spouses inherited an extra ISA limit, the APS, so an ISA held by one spouse could readily be placed in an ISA for the surviving spouse without worrying about the annual limit, whilst the funds can be left in the estate I think I would be tidying them up as soon as possible as there seems little advantage delaying.

https://www.yourmoney.com/retirement/de ... -in-april/

scrumpyjack
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Re: Tax Treatment of Investment Trusts

#376657

Postby scrumpyjack » January 13th, 2021, 4:25 pm

Charlottesquare wrote:
scrumpyjack wrote:
AJC5001 wrote:
No, you didn't imagine it. :)

HL have a description here https://www.hl.co.uk/investment-services/isa/additional-permitted-subscription-aps

Adrian


It is worth noting that the ISA can carry on in the estate for up to 3 years with no tax on the dividends and no capital gains tax, irrespective of whether it is being left to a spouse/civil partner etc. In some circumstances it may be worth not being too eager to complete estate administration too quickly.


I thought spouses inherited an extra ISA limit, the APS, so an ISA held by one spouse could readily be placed in an ISA for the surviving spouse without worrying about the annual limit, whilst the funds can be left in the estate I think I would be tidying them up as soon as possible as there seems little advantage delaying.

https://www.yourmoney.com/retirement/de ... -in-april/


If there isn't a spouse, it might be in the interests of the residuary beneficiary for the ISA just to carry on for a while, retaining its tax benefits, in an extended administration period. So if it took the executor 2 years, for example, to complete the estate administration, that is 2 extra years of ISA benefits that would not otherwise be had - (income roll us tax free and capital gains similarly continue tax free)


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