The evolution of an unsheltered income-portfolio account

[Itsallaguess]

It's around this time of year that I start to finalise my plans for the forthcoming new tax-year, and the utilisation of the tax-free allowance that opens up at the beginning of April, and with the unsheltered Dividend Allowance dropping to £1000 soon, I will be continuing with what for me has been a fairly lengthy, multi-year process of aggressively reducing my unsheltered dividend income where most appropriate to do so, and again transitioning some income-generating capital over to one of my ISA accounts.

This wouldn't normally be out of the ordinary for me, but it's a much more interesting process for me this year because it looks like following this year's account-management process, I'm really not going to be left with too much at all in terms of dividend-generating holdings in my unsheltered account, and with the relatively small number of holdings that is both currently in it, and certainly will be left in it after this round of change, it's now quite starkly turning into what I've had planned for it over many years now, which is going to be the holding-ground for some of my non-income 'steady-eddies', with the odd 'growth' holding dotted about as well, along with a level of 'warchest cash' which I plan on keeping available over the long-term, which provides options for 'opportunity-trades' if the market chooses to present them, which it does regularly enough to help provide a little bit of 'non-income related' market interest...

So how it will probably look from April of this year, and with a view to keeping my unsheltered dividend income under the £1000 allowance, is something like this -

• Vanguard LifeStrategy 80% (Yield around 1.6%)

• Foreign & Colonial IT (FCIT - Yield around 1.5%)

• JP Morgan India IT (JII - Yield 0%)

• Two or three remaining single-share HYP holdings (Yield around 4%)

I've got two ISA share accounts that now hold the vast bulk of my income-generating holdings, and I always try to utilise the full ISA allowance each year to ensure that I'm making the best use of both tax-year periods and their associated ISA allowances to gain as much 'portfolio shelter' as possible over the long term, and I think I'm very fortunate to be in the position of looking like I'll just about be able to dip my head under the lower unsheltered £1000 dividend allowance after aggressively following that plan for many years now.

With so much movement in that allowance over recent years, I will certainly put a lot of that down to being more luck than judgement, but we can only try to make best use of these ISA allowances as they are presented to us over the years, and if nothing else, I will give myself some credit for at least not wasting those valuable opportunities as they've been presented to me over quite a lot of years now. I do distinctly remember reading quite a few posts from experienced investors back in the Motley Fool days where they were very keen to point out that such tax-sheltering opportunities should never be wasted, and it was never too soon to start getting as much inside ISA's as possible, and I'm so glad for both their keen wisdom on that subject, and the luckier fact that I actually took that advice on board, both then and over the longer term since, as it's been one of my better decisions, certainly...

These new ISA allowances will for me usually be made up from a level of 'unsheltered capital rotation' as well as an accompanying level of fresh capital from my working wages, which have been saved up for that purpose over the previous year, and by alternating the ISA accounts that receive each fresh tax-year's 'attention', it's been surprising how relatively balanced I've been able to maintain both of my ISA accounts over a number of years now.

The main reason for me posting this though, other than just offering up a window into my own tax-management processes, is to highlight that my single unsheltered-account was where it all started for me in terms of income-investment, and where my original single-share HYP grew up and matured before I moved over to a much more 'income-IT' based strategy many years ago, and this year's tax-management process is now really shining a light on the end of that original single-share, HYP-based story now, because whilst I'll be selling down some of the few remaining unsheltered single-share holdings as part of this process, the transferred capital that those sales generate will again be moving into income-IT holdings, and what's going to be left in my original 'unsheltered HYP account' will be a skeleton-crew of single-share holdings, probably all of which will go for good around this time next year, leaving that unsheltered shares account then acting solely as the 'low-yield-ballast' section of my largely income-based approach...

Cheers,

Itsallaguess

[seagles]

I have been doing a similar exercise to you, also taking care of the CGT side of the "portfolio" in unsheltered trading account. I thought that I had reached the point of not needing to do anymore "selling" or "bed & isa" moves as my income from this account was around the mid £700's. The last trade in it was when I top-sliced my BP shares and added to my Centrica (CNA). So your post has come at an opportune time for forward planning.
After reading your post am likely to "sell" some of the higher yield HYP shares and look at Growth IT's, notably FCIT, which I see in your list. I have brought this share into my SIPP, my daughters HYPish ISA and my Grandaughters JISA, and it has done "what it says on the tin". Going forward will be looking at a similar scenario to you, keeping a few HYP shares and moving to a few "growth" ITs.
If it was not for the point that I have "left" the trading account to my Grandaughter in my will I probably would utilise the "bed & isa" of Iweb. To be honest though it is a very small part of my overall portfolio and unlikely to see any "new" money going into it.
My main motivation of doing this originally was me begrudging paying "tax" to HMRC on anything,

[Dod101]

It has been touched upon but IAAG should not forget about CGT. It can be a complicated tax to calculate but it can be removed with a onetime sale outside and buyback inside an ISA. It is a great relief to me when I make a sale to take some profit and do not even have to consider CGT. For instance, I made several sales of Scottish Mortgage during its glorious year or 18 months without paying or even thinking about CGT. I have still got some dividend paying shares outside of my ISA but I also have quite a few so called 'growth' shares inside my ISAs.

It is likely that my transfer into an ISA will be made up of dividend paying shares for the new tax year.

Dod

[ikethespike]

I have not been as diligent as you two (itsallaguess and seagles) in moving from unsheltered to ISA. There are opportunities, as you describe, this tax year and next but it becomes more problematic in 24/25 when the dividend allowance falls to £500 and capital gains to £3000, double for a couple though.

[Wuffle]

As an outlier in wealth terms around here - I haven't got any - I don't have to concern myself with this. Yet.
The personal allowance plus 20k is close enough to my salary before any pension contributions are considered.

The intellectually horrifying thing I currently do is to pull my dividend income out and have a regular payment structured to use that cash to buy back whatever looks cheap that month.
It is an anomaly of HL cost structure that a vanilla IT purchase is 12 quid but a monthly regular saver purchase only 1.50.
Currently I can forsake the ISA money that round trips (or stick it in a pension and get the tax benefits if I am so inclined).

But, there is a parental unit left who had a nice house in the Midlands but is now in care.
So I might have to do the ISA dance and switch off the divi round trip at some point. Or I might not.
I couldn't afford to stop work even if I were so inclined but having a full salary to load up a pension against will also be handy if the parental unit dies sooner rather than later.

Which is my point.
Surely this is really common. Lots of parents, lots of houses.

W.

[mike]

My portfolio is mainly income producing ITs with about 30% unseltered, the balance in 3 ISAs.

I've taken the view that with the new reduced allowances for CGT (£12k this year, £6k 23/24 and just £3,000 in 24/25) that reducing the risk of an unexpected tax liability is my priority.

The dividend tax liability can be forecast and planned for at the beginning of the tax year, but events may mean a CGT liability rears its head.

So since the announcement of the reduced CGT allowances, I have been, and will continue to, sell down and transfer into my ISAs those with the highest percentage capital appreciation and keep those showing capital losses and the lowest gains to transfer in when the allowance is down to £3,000.

The unsheltered dividends will naturally reduce as well, although obviously not as quickly as if I was targetting those with the highest current yield.

[Gersemi]

As an outlier in wealth terms around here - I haven't got any - I don't have to concern myself with this. Yet.
The personal allowance plus 20k is close enough to my salary before any pension contributions are considered.

The intellectually horrifying thing I currently do is to pull my dividend income out and have a regular payment structured to use that cash to buy back whatever looks cheap that month.
It is an anomaly of HL cost structure that a vanilla IT purchase is 12 quid but a monthly regular saver purchase only 1.50.
Currently I can forsake the ISA money that round trips (or stick it in a pension and get the tax benefits if I am so inclined).

But, there is a parental unit left who had a nice house in the Midlands but is now in care.
So I might have to do the ISA dance and switch off the divi round trip at some point. Or I might not.
I couldn't afford to stop work even if I were so inclined but having a full salary to load up a pension against will also be handy if the parental unit dies sooner rather than later.

Which is my point.
Surely this is really common. Lots of parents, lots of houses.

W.

I would think so - it happened to me about 16 years ago and I'm still in the process of moving holdings to my ISA's desipte using the full £20,000 allowance every year. It didn't seem that important as I was always a BR taxpayer and there was no further tax to pay on dividends at first, and no capital gains to speak of. But things change, dividend tax came in and I've been trying to get the dividends below the allowance - I managed it a couple of years ago - and so they reduce the allowance! Also reducing the capital gains tax allowance is a blow - it seems more than ever like a tax on inflation. However I have no income other than investment income for the next three years and a small amount of capital gains tax loses, so I'm hoping to get the rest of my investments inside ISA's before then. I'm also using dividends arising inside the ISA to purchase holdings outside, and then I sell the duplicate unsheltered holding and use the money to fund living expenses, so in essence I'm able to extract the ISA dividends to fund day to day expenses without losing the ISA allowance.

It does show however the important of using the ISA allowances to the max all the time. I have used the full allowance since I had enough spare income to do so, but have still struggled to get everything in. It would be worse if I hadn't used them to the full when it didn't seem necessary.

[kempiejon]

t's around this time of year that I start to finalise my plans for the forthcoming new tax-year, and the utilisation of the tax-free allowance that opens up at the beginning of April, and with the unsheltered Dividend Allowance dropping to £1000 soon, I will be continuing with what for me has been a fairly lengthy, multi-year process of aggressively reducing my unsheltered dividend income where most appropriate to do so, and again transitioning some income-generating capital over to one of my ISA accounts.

Yup, me too.

I have been filling my SIPP and ISA each year with unsheltered holdings and conveniently harvesting some capital gains taking advantage of that tax free allowance. Last year my unsheltered income, like seagles, was £700 odd.
In my unsheltered account there'll be almost nothing left after March so like Itsallaguess that'll be the end of that section of my HYP. I've done a quick squizz at the account I see that I still hold Centrica, Marks & Spencer and De La Rue from the early days. There's not been a need to shelter their income nor trouble me to harvest any cap gains...
As a method for selling I've already set a few limit orders at the upper ranges of some stocks, I might set a few more or use a Halifax cheap dealing day, but to be honest I expect there'll be a day of admin in March when anything left will be dumped.
As I hope to stop working within the next few years that'll reduce new money for investment and unless ISA and SIPP levels are reduced I probably won't hold any unsheltered investments.

[Adamski]

Nice Post. I also use what pension allowance I can, and spouse/children isa and pension allowances. You never know if future govt could cap ISA benefits as its a mechanism which helping wealthy most, so ISAs could be target of future policy makers.

[tjh290633]

I've got two ISA share accounts that now hold the vast bulk of my income-generating holdings, and I always try to utilise the full ISA allowance each year to ensure that I'm making the best use of both tax-year periods and their associated ISA allowances to gain as much 'portfolio shelter' as possible over the long term, and I think I'm very fortunate to be in the position of looking like I'll just about be able to dip my head under the lower unsheltered £1000 dividend allowance after aggressively following that plan for many years now.

With so much movement in that allowance over recent years, I will certainly put a lot of that down to being more luck than judgement, but we can only try to make best use of these ISA allowances as they are presented to us over the years, and if nothing else, I will give myself some credit for at least not wasting those valuable opportunities as they've been presented to me over quite a lot of years now. I do distinctly remember reading quite a few posts from experienced investors back in the Motley Fool days where they were very keen to point out that such tax-sheltering opportunities should never be wasted, and it was never too soon to start getting as much inside ISA's as possible, and I'm so glad for both their keen wisdom on that subject, and the luckier fact that I actually took that advice on board, both then and over the longer term since, as it's been one of my better decisions, certainly...

As Dod says above, you must not forget CGT implications. I certainly took every opportunity to make use of the PEP allowances when they came in, and I had only a couple of holdings left unsheltered. One of those has been used to provide some cash, rather than extract it from my current ISA, and it is one of those where, after a long period of no income, from 2002 until 2015, they suddenly restarted accumulating distributions. Initially £2.74, not enough to frighten the horses, but gradually increasing to £383 last year, so time to take action.

I have not been as diligent as you two (itsallaguess and seagles) in moving from unsheltered to ISA. There are opportunities, as you describe, this tax year and next but it becomes more problematic in 24/25 when the dividend allowance falls to £500 and capital gains to £3000, double for a couple though.

This being a fund which I have held since 1970, CGT has always been a possible threat, but I have used it on 4 previous occasions to release funds for PEP or ISA contributions. The gain on the latest transaction was in excess of £3,000, so again being none to soon to take a bit of profit.

The importance of making use of "His and Her" ISAs, if you are in a potentially dangerous situation from a taxation point of view, cannot be emphasised too much. I fancy that the time is coming when the remainder will have to go inside a shelter.

TJH

[77ss]

....
I've taken the view that with the new reduced allowances for CGT (£12k this year, £6k 23/24 and just £3,000 in 24/25) that reducing the risk of an unexpected tax liability is my priority.

The dividend tax liability can be forecast and planned for at the beginning of the tax year, but events may mean a CGT liability rears its head.....

Agreed. For me, the fairly drastic reduction in CGT allowance is more concerning than the income tax.

Last year, I harvested much of mine by selling a winner, and rebuying after the requisite 30 days. I may do the same this year - reserving the annual ISA move for high income/low CG holdings.

Clearly one runs the risk of the share price moving against you - but equally it may move in your favour - it did for me. Even if it moves against you, it may be a price worth paying to crystallise your CG - and one is not obliged to rebuy the same share - having an 'option b' may be sensible.

[Lootman]

....I've taken the view that with the new reduced allowances for CGT (£12k this year, £6k 23/24 and just £3,000 in 24/25) that reducing the risk of an unexpected tax liability is my priority.

The dividend tax liability can be forecast and planned for at the beginning of the tax year, but events may mean a CGT liability rears its head.

Agreed. For me, the fairly drastic reduction in CGT allowance is more concerning than the income tax.

Yes, although also note that things could get even worse in a couple of years, with Labour making noises about taxing investment profits similarly to employment income.

That means CGT of 20% rather than 10% for a basic rate taxpayer. And 40% or 45% versus 20% for a higher rate taxpayer.

Similarly the tax on dividends could go from 7.5% to 20% for a BRT, and from 33% to 40% for a HRT, and so on.

My current thinking therefore is to engage in accelerated sales in my taxable accounts over the next 18 months, which cuts across three tax years. I will pay 20% CGT but that might look like a bargain in 2025. The proceeds will go into low or no yielding investments. Or simply go to form a cash cushion for the next few years so I won't need to sell more, other to fund future ISA contributions (assuming that the ISA rules aren't messed about with, of course).

I am just glad that I had many years of relatively low taxes on my investments, as I fear that may be coming to an end now.

[BullDog]

A timely reminder from Iaag to not let ISA allowance go to waste if you can possibly manage it.

Myself and Mrs BD will have all our non pension investments inside ISA wrappers just before the tax free dividend allowance is to all intentions withdrawn next year.

Next on the politicians agenda? A cap on ISA investments is highly likely I believe. But that's for another thread.

[88V8]

Two options for ii customers that I have never used mainly because I did not know they were there:

Bed & ISA, which reportedly eliminates much of the spread.

And transferring from an account direct to OH's account, which I believe eliminates all the spread and may be useful if OH has not used all their income allowance.

Despite using both ISA allowances for years, our unsheltered account is roughly four times bigger. No chance of sheltering that.

I made a big sale at the end of October to use up my CGT and losses brought forward. Unfortunately just as I did that China started opening up and after the 30 days purdah some of those stocks that I would have liked to rebuy had risen so much it may be years before I can rebuy them. I should have transferred them to OH for safe-keeping as it were.

I don't see the logic of cutting one's gross income to minimise tax. After all, it's not as if one is left with nothing and what's the alternative? Growth shares that don't?

Oh for the simple days when divis were untaxed. Blooming Labour.... except it was what used to be called the Conservatives...

V8

[gpadsa]

I don't see the logic of cutting one's gross income to minimise tax. After all, it's not as if one is left with nothing and what's the alternative? Growth shares that don't?

Cutting gross income by diverting to a SSAVC could get taxable earnings below the 40% higher rate threshold assuming one can get by on what is left after £50,270 has been taxed? Then in (hopefully more-comfortable) retirement if taxable income didn't exceed the higher rate threshold it should have been worth the sacrifice. Have I got that right

gpadsa

[Itsallaguess]

Thanks to everyone who's mentioned the tax-year opportunities for managing potential Capital Gains Tax issues - that wasn't a concious omission on my part, but more related to the fact that with my unsheltered 'original HYP' account only now representing around 20% of my overall-invested capital nowadays, after many years of diligent ISA-allowance take-up, the unsheltered 'individual holding' CGT side of things are now mostly at a level where they are much more manageable when compared to the dividend-income related tax-pressures, so it's never really needed the required focus from me that the dividend side of things has attracted over recent years.

As others have mentioned though, these Dividend and/or Capital Gains tax-related issues can often be skewed in different ways for different people, especially for individual unsheltered holdings that might have been held for many years, and so a good reminder that it's all part of the 'opportunity-mix' that we should always look to take full advantage of whilst these time-based windows are available to us...

Also, thanks to ikethespike for the reminder that whilst my initial post was looking ahead a little, regarding me trying to manage the new tax-year in April, there may well still be current-tax-year allowances that people have yet to take full advantage of, which might present a double-whammy sheltering opportunity for anyone who's yet to even use their full 2021/22 ISA or CGT-related personal allowances.

With time-limited opportunities like this, it's important to get motivated and grasp the nettle, and so with a couple of months to go yet of this current tax year, then hopefully these types of discussions might help to spur people on who might otherwise have allowed the current tax-year opportunity to slip by without being fully utilised...

I do enjoy this time of year from a portfolio-management point of view, as broadly speaking, outside of the seven or eight regular fresh investments I might make throughout a normal year, comprised mainly of accumulated income from dividends within each of my separate accounts, the couple of months around February and March provide me with a welcome annual drum-beat within which to undertake some other interesting portfolio-management processes, and after the Christmas period it's an enjoyable way for me to regain some investment-based focus whilst making sure I'm utilising these tax-sheltering opportunities in the most efficient manner...

Cheers,

Itsallaguess

[micrographia]

Cutting gross income by diverting to a SSAVC could get taxable earnings below the 40% higher rate threshold assuming one can get by on what is left after £50,270 has been taxed? Then in (hopefully more-comfortable) retirement if taxable income didn't exceed the higher rate threshold it should have been worth the sacrifice. Have I got that right

gpadsa

I suspect 88V8 is referring to those who are fortunate enough to have substantial investment income from non-sheltered sources?

Having said that, my employer offers an SSAVC option for the Defined Contribution part of my hybrid occupational pension scheme so I do exactly what you suggest. The AVCs will let me maximise the amount of tax free cash I can extract from my pension on retirement without touching the sacred Defined Benefits part of my pension. This AVC cash will be moved into our ISAs ASAP for investment for income. This will take more than a couple of tax years so there will be a question about what might be done with the money while it's waiting to be sheltered, which is why I pay attention to conversations like this one.

There is also a minor immediate financial benefit to doing this for those of us receiving child benefit, linked to a major incentive for those of us who have a deep aversion to filling in a self-assessment tax return every year.

Regards, EEM

[gpadsa]

Cutting gross income by diverting to a SSAVC could get taxable earnings below the 40% higher rate threshold assuming one can get by on what is left after £50,270 has been taxed? Then in (hopefully more-comfortable) retirement if taxable income didn't exceed the higher rate threshold it should have been worth the sacrifice. Have I got that right
gpadsa

I suspect 88V8 is referring to those who are fortunate enough to have substantial investment income from non-sheltered sources?

yes I misunderstood

Having said that, my employer offers an SSAVC option for the Defined Contribution part of my hybrid occupational pension scheme so I do exactly what you suggest.

that's encouraging. I think the £50,270 can be pushed higher by making Gift Aided donations too

gpadsa

[micrographia]

that's encouraging. I think the £50,270 can be pushed higher by making Gift Aided donations too

When the kids were younger I maxed out the salary sacrifice Childcare Voucher scheme - making AVCs was out of the question for us at the time. It was a great help for the family finances since we needed to pay for nursery and school clubs anyway. Presumably the Tax Free Childcare scheme that replaced it is still a no-brainer if you are eligible for it. I'm happy to see that cash being redirected towards retirement goals now, though expenditure from net income doesn't seem to be shrinking as the kids get older .

EEM

[Fluke]

I too have just been through this exercise. For some years now since stopping work and not having much by way of new money to add to my ISA, I would bed and ISA £20k worth of shares at the start of the tax year. It was always obvious what to move to minimise charges but this year was a bit different, I couldn’t decide back in April what to shelter to best effect so I thought I'd leave it for a while, I’m glad I did, I didn’t know then about the upcoming changes to dividend and CGT tax allowances. I have never sold enough in one go to worry about capital gains tax but with the allowance reducing to £6k next year I realised I might have to, so that made the decision for me. I moved £20k worth of Fundsmith shares from my unsheltered account on their platform to my associated ISA account. There is a £9/10k gain there which next year would have in part become taxable.

Over in my HL account I will have generated £1,200 in unsheltered dividends by the end of this year which I wanted to get down for next year. I had about £10k of accumulated dividends in my HL ISA so I bought about £5k each of Sainsbury’s and Land Securities and sold the same from my unsheltered (Fund and Share) account. Those two generated between them £522 in divi’s this year so that should in theory reduce my unsheltered dividends next year to about £700, thus avoiding any dividend tax. I will use the cash for living expenses.

Next year I have to decide what to do about my unsheltered Diageo shares, they are currently showing a gain of about £12k, I will probably wait until I have enough cash in my ISA and then sell enough to keep the capital gain to below the £6k and re-buy them in the ISA, then bed and ISA the remainder of the Fundsmith shares, down to about £7k now. So next year may be the first year I don’t use my full ISA allowance since taking it out in 2007.

I do distinctly remember reading quite a few posts from experienced investors back in the Motley Fool days where they were very keen to point out that such tax-sheltering opportunities should never be wasted, and it was never too soon to start getting as much inside ISA's as possible, and I'm so glad for both their keen wisdom on that subject, and the luckier fact that I actually took that advice on board, both then and over the longer term since, as it's been one of my better decisions, certainly...

I took their advice too, lapped it up, I was like a sponge for all the freely imparted knowledge and advice from so many wise folk, all in plain English too. I went from having little and knowing nothing about finance to paying off my mortgage, retiring early and living off my investments. I'm still a long way off the state pension age but it'll be a bonus when I get it rather than something I need to live on. Thanks to the Fool, TLF and myself for listening and then acting. It's one thing to listen and learn, quite another to put your hard earned on the roulette wheel.