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Selling before ex dividend date and then buying back

Practical Issues
Bgsbgs
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Selling before ex dividend date and then buying back

#410489

Postby Bgsbgs » May 9th, 2021, 10:57 am

Are there any issues with this the following strategy to avoid paying dividend tax:
Company/etf declares a dividend of x p.
Sell the stock/etf before the ex dividend date
Buy it back after the ex dividend date, at a price x p lower than before, so I am left with the same stock plus an amount of cash equivalent to the dividend (minus transaction costs).

I have paid some transaction costs, but avoided receiving a dividend which would trigger a tax charge (it will ultimately be converted to capital gains, but that rate is much lower).

Alaric
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Re: Selling before ex dividend date and then buying back

#410493

Postby Alaric » May 9th, 2021, 11:11 am

Bgsbgs wrote:Are there any issues with this the following strategy to avoid paying dividend tax:


There is a risk of losses from market movements which is greater than the marginal savings from avoiding dividend tax. That's particularly true on individual stocks where, say, a price gain of 10% in a short period of time is not an unusual event.

Dod101
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Re: Selling before ex dividend date and then buying back

#410495

Postby Dod101 » May 9th, 2021, 11:15 am

I should think that this is not worth the effort. You are exposed to uncontrollable market forces where you could lose much more than you might gain. Surely you are much better to buy shares that are low yielding or indeed that do not pay any dividend.OTOH if you have found the secret formula you could team up with someone who is an income investor.

Dod

Alaric
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Re: Selling before ex dividend date and then buying back

#410505

Postby Alaric » May 9th, 2021, 11:51 am

Dod101 wrote:Surely you are much better to buy shares that are low yielding or indeed that do not pay any dividend.


There's an idea that should work if markets are generally rising and there's CGT Annual Allowance not utilised . This is to choose a popular index or two and exploit the point that there are likely to be multiple brands of ETF tracking it. Periodically, sell one brand and buy another. The idea is to rebase the CGT cost upwards. The 30 day rule makes this ploy ineffective for individual shares but Brand A ETFs are considered different from Brand B ETFs even though the underlying investments may be identical.

Arborbridge
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Re: Selling before ex dividend date and then buying back

#410510

Postby Arborbridge » May 9th, 2021, 12:12 pm

It's a plan, occasionally aired here. My feeling is that this is not certain to make gains after charges even probable, due to the market variable - but why not experiment for a year or so? Then you can let us know.

Arb.

Bgsbgs
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Re: Selling before ex dividend date and then buying back

#410522

Postby Bgsbgs » May 9th, 2021, 12:26 pm

Alaric wrote:
Bgsbgs wrote:Are there any issues with this the following strategy to avoid paying dividend tax:


There is a risk of losses from market movements which is greater than the marginal savings from avoiding dividend tax. That's particularly true on individual stocks where, say, a price gain of 10% in a short period of time is not an unusual event.



It could be as short as a day, so not too concerned about that, and prepared to take the risk.

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Re: Selling before ex dividend date and then buying back

#410525

Postby Bgsbgs » May 9th, 2021, 12:28 pm

Dod101 wrote:Surely you are much better to buy shares that are low yielding or indeed that do not pay any dividend.

Dod


I want to invest in value stocks at the moment and they tend to have high dividend yields.

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Re: Selling before ex dividend date and then buying back

#410527

Postby Bgsbgs » May 9th, 2021, 12:31 pm

ReallyVeryFoolish wrote:On anything other than massive portfolios, I think the buy and sell trade costs plus stamp duty will render it uneconomic anyway.

RVF


You are right that stamp duty would probably wipe out most of it, so not great for UK single stocks. Otherwise the cost seems manageable (bid offer plus a flat dealing cost).

Dod101
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Re: Selling before ex dividend date and then buying back

#410538

Postby Dod101 » May 9th, 2021, 12:54 pm

Bgsbgs wrote:
Dod101 wrote:Surely you are much better to buy shares that are low yielding or indeed that do not pay any dividend.

Dod


I want to invest in value stocks at the moment and they tend to have high dividend yields.


O good! Maybe I could sell you some value shares. I have been waiting for something to happen for at least the past decade.

Dod

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Re: Selling before ex dividend date and then buying back

#410549

Postby dealtn » May 9th, 2021, 2:02 pm

Dod101 wrote:I should think that this is not worth the effort. You are exposed to uncontrollable market forces where you could lose much more than you might gain.


Those "uncontrollable market forces" are symmetric surely?

Dod101
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Re: Selling before ex dividend date and then buying back

#410556

Postby Dod101 » May 9th, 2021, 2:26 pm

dealtn wrote:
Dod101 wrote:I should think that this is not worth the effort. You are exposed to uncontrollable market forces where you could lose much more than you might gain.


Those "uncontrollable market forces" are symmetric surely?


Absolutely. But I must say my experience is that they usually work against me more than for me.

Dod

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Re: Selling before ex dividend date and then buying back

#410563

Postby EssDeeAitch » May 9th, 2021, 2:49 pm

If it were that simple............

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Re: Selling before ex dividend date and then buying back

#410564

Postby XFool » May 9th, 2021, 2:51 pm

Bgsbgs wrote:Are there any issues with this the following strategy to avoid paying dividend tax:
Company/etf declares a dividend of x p.
Sell the stock/etf before the ex dividend date
Buy it back after the ex dividend date, at a price x p lower than before, so I am left with the same stock plus an amount of cash equivalent to the dividend (minus transaction costs).

I have paid some transaction costs, but avoided receiving a dividend which would trigger a tax charge (it will ultimately be converted to capital gains, but that rate is much lower).

Unless it is a stonkingly large dividend, why bother? Can it not simply be in, or moved gradually into, an ISA?

Is the dividend tax saved really going to be significantly more than the "transaction costs" - which include buying/selling charges, spread, possibly stamp duty, market price movement risk?

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Re: Selling before ex dividend date and then buying back

#410569

Postby PinkDalek » May 9th, 2021, 3:54 pm

Bgsbgs wrote:It could be as short as a day, so not too concerned about that, and prepared to take the risk.


In case you are not already aware of the identification matching rules for CGT purposes, the topic linked below goes into some considerable detail:

viewtopic.php?f=49&t=28864

I'm unsure if that topic covers "same day" transactions which are outlined here:

https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51560

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Re: Selling before ex dividend date and then buying back

#410577

Postby Gengulphus » May 9th, 2021, 4:48 pm

Bgsbgs wrote:Are there any issues with this the following strategy to avoid paying dividend tax:
Company/etf declares a dividend of x p.
Sell the stock/etf before the ex dividend date
Buy it back after the ex dividend date, at a price x p lower than before, so I am left with the same stock plus an amount of cash equivalent to the dividend (minus transaction costs).

I have paid some transaction costs, but avoided receiving a dividend which would trigger a tax charge (it will ultimately be converted to capital gains, but that rate is much lower).

Look at the typical numbers for a reasonably high-yielding share, with an annual dividend yield of say 5%. Assuming you're a higher-rate taxpayer, you pay Income Tax on them at the dividend rate of 32.5% (*). That's a total of 32.5% of 5% = 1.625% of the holding's capital value per year.

Assuming it's a twice-yearly payer, it might typically pay a 2% interim dividend and a 3% final dividend, and if you use your strategy, you'll have to sell and buy back the holding twice per year. No matter how big your holding, you'll have to pay somewhat more than 0.5% in transaction costs for each sell & repurchase 'round trip', since stamp duty is charged at 0.5% of the capital value of the holding each time and there are other transaction costs. So more than half of your Income Tax savings will disappear in stamp duty - you're more-than-half just replacing the payment of one tax with another, even before taking CGT into account (which I'll do a bit further down in this reply).

Then look at the other transaction costs. There's bid/offer spread, which assuming we're dealing with a large-cap, very liquid share will be a much smaller percentage than stamp duty's 0.5% - but not totally negligible. After taking that into account, your net gain can be expected to be somewhat less than 1.625% - 1% = 0.625% of the holding's capital value per year - maybe 0.5% of the holding's capital value per year.

There's still broker commission to pay - you'll have two selling commissions and two buying commissions to pay per year on the holding. If you pick your moments to trade on all of the trades, you might get the commission costs on the holding down to something around 4 * £10 = £40 per year; if you use various brokers' cheap 'pooled' purchases, you might get them down to around 2 * £10 + 2 * £2 = £24 per year (though at the cost of having less control over exactly when and at what price you repurchase). So if that £40 or £24 per year is more than about 0.5% of the holding's capital value, you can expect to lose more on transaction costs than you save on Income Tax. That means that the holding's capital value needs to exceed around £8k or £4.8k respectively for you to expect to come out ahead at all on Income Tax savings less transaction costs - and to exceed those thresholds by quite a way if you want the amount you expect to come out ahead by to be even mildly significant...

So what about CGT? The main thing to say about it is that when you sell, you always bring a capital gain or loss into existence for CGT purposes, no matter how soon you repurchase. There is a frequently-encountered myth about the 'anti-bed-and-breakfasting' or '30-day' rule, the myth being that if you repurchase your shares within 30 days after selling, the sale is cancelled out for CGT purposes, so that any gain or loss is deferred until you eventually sell 'for good' by not repurchasing within 30 days. The truth is that the sale is not cancelled out for CGT purposes: instead, the gain or loss on the sale is calculated from the price at which you repurchased if you repurchase on the same day as the sale or any of the next 30 days, and is only calculated from the original purchase price if you repurchase 31 days or more after the sale. (I'm fairly certain that the reason why the myth is so prevalent is the rule's origin in trying to counteract bed-and-breakfasting - i.e. people selling one day and buying back the next to realise major capital gains or losses on existing holdings. Before the rule was introduced, someone with a holding standing on an unrealised gain or loss of say £10k could sell it late one day and buy it back early the next day to realise that big gain or loss and bring it into account for CGT, which could be used judiciously to save thousands of pounds of CGT: if it cost them a hundred or two pounds due to transaction costs and/or share price fluctuations, they still came out ahead. After the rule was introduced, the sale would only realise a gain or loss of that hundred or two pounds, with an effect on CGT paid of only a few tens of pounds, and that effect would be in a pretty unpredictable direction, so much less useful for optimising one's CGT bill. I.e. in the context of the amounts of CGT people had previously been saving by bed-and-breakfasting, the new rule more-or-less cancelled out the opportunities to do so - and the "more-or-less" part of that often wasn't made clear, doubtless in the interests of giving a 'simple' explanation of the change... But here, we're dealing with dividends, which are typically just a few percent of the holding's capital value, rather than unrealised capital gains that are worth 'defusing', which are often quite high percentages of the holding's capital value, and that makes the "more-or-less" part much more significant.)

The point of all that is that the savings your strategy aren't just converted to capital gains "ultimately" - they actually become capital gains in the same year: expect to be realising capital gains equal to the dividend income your strategy 'dodges', less the trading costs (since they'll be 'allowable costs' in the calculations of the capital gains/losses). That's definitely a statistical expectation rather than something you can expect to happen at all accurately in individual cases - but assuming that you apply the strategy to lots of dividend payments, you can expect it to at least roughly average out. So since we're still assuming a higher-rate taxpayer, for someone who has used up their CGT allowance, one should roughly expect a CGT bill of 20% of the net result of the Income Tax savings less the transaction costs. I.e. for such a taxpayer, one can (statistically) expect the final net outcome to be 80% of what we've worked out above - making it a bit less worthwhile still. But only a bit - the resulting CGT bill isn't likely to be large.

There is however another cost of that CGT: having to calculate one's capital gains and losses and report them to HMRC in one's tax return. Selling and repurchasing say a £10k holding twice per year adds £20k to your total disposal proceeds for the year. Do that for three or more such holdings and your total disposal proceeds for the year will exceed four times the CGT allowance, which means that if HMRC asks you to fill in a tax return (quite likely for a higher-rate taxpayer), you'll have to answer "yes" to one of the questions that obliges you to report on your capital gains and losses... The net result is that if you make much use of your strategy, you're likely to find yourself having to do a load of capital gain/loss calculations (which if you make use of brokers' 'pooled' purchases are liable to involve a lot of fiddly apportionments, due to generally not being able to ensure you buy exactly the number of shares you sold).

In short, the strategy might make some savings compared with just receiving the dividends, but the savings are highly likely to be very small, and to require a lot of work tracking the dividends, making the sales and purchases, and accounting for the CGT - and the last of those will be quite irritating, or at least it would be for me: having to do dozens of gain/loss computations, each quite small and likely to mostly cancel each other out is actually even less attractive work for me than if the gains and losses were worthwhile amounts! And as others have indicated, quite a bit of random variation can be expected: it's quite possible that in some years, the strategy will actually lose money due to randomly happening to get a lot of cases where share price fluctuations between sale and repurchase act against you.

There are a lot of assumptions in the above that might well not reflect your situation - e.g. if you're a basic-rate taxpayer, the Income Tax rate on dividend income is 7.5% rather than 32.5% and it's much less likely that the Income Tax savings will even pay for the stamp duty transaction costs, let alone the others. If the share has a higher yield than 5%, the Income Tax savings will be larger and so it's more likely that there will be a decent amount of them left after netting off the transaction costs. Indeed, it's actually best to do the calculations at the "individual dividend yield" level - in the case of the 5%-yielder mentioned above, its final dividend saves 32.5% of 3% = 0.975% of its capital value in Income Tax, while its interim dividend saves 32.5% of 2% = 0.65% of its capital value. Netting off the 0.5% of capital value needed to pay stamp duty leaves 0.475% for the final dividend, over three times the 0.15% left for the interim dividend - and the bid/offer spread and broker commission transaction costs will make that disparity even greater. And note that e.g. a 6%-yielder that pays four equal quarterly payments is a hopeless proposition for the strategy: the Income Tax saving is 32.5% of 1.5% = 0.4875% of its capital value per payment, which is not even enough to pay the 0.5% stamp duty for the buying the shares back. And a 4%-yielder than pays just once per year is a better proposition than the 5%-yielder with a 3%:2% final:interim split. I.e. individual dividend yields tell you more about whether the strategy has a decent chance than annual total dividend yields.

So if you do want to try it, I'd recommend that you set a minimum percentage for the individual dividend yield at which you'll consider doing it and only do the sell and repurchase if the individual dividend you're considering is at least that percentage of the holding's capital value. That doesn't mean that I recommend doing it: I don't! I recommend against it as at best producing small extra returns for an inordinate amount of risk and work. But if you decide you want to try it nevertheless, do set that minimum percentage, choosing it so that the net savings you can reasonably expect from the strategy are big enough in your opinion to justify the risk and work you take on.

(*) "Dividend tax" is not actually a separate tax - it's just Income Tax, which is applied at different, somewhat lower rates for dividend income than for most types of income.

Gengulphus

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Re: Selling before ex dividend date and then buying back

#410685

Postby Bgsbgs » May 10th, 2021, 8:52 am

Gengulphus wrote:
Look at the typical numbers for a reasonably high-yielding share, with an annual dividend yield of say 5%. Assuming you're a higher-rate taxpayer, you pay Income Tax on them at the dividend rate of 32.5% (*). That's a total of 32.5% of 5% = 1.625% of the holding's capital value per year.

Assuming it's a twice-yearly payer, it might typically pay a 2% interim dividend and a 3% final dividend, and if you use your strategy, you'll have to sell and buy back the holding twice per year. No matter how big your holding, you'll have to pay somewhat more than 0.5% in transaction costs for each sell & repurchase 'round trip', since stamp duty is charged at 0.5% of the capital value of the holding each time and there are other transaction costs. So more than half of your Income Tax savings will disappear in stamp duty - you're more-than-half just replacing the payment of one tax with another, even before taking CGT into account (which I'll do a bit further down in this reply).

Then look at the other transaction costs. There's bid/offer spread, which assuming we're dealing with a large-cap, very liquid share will be a much smaller percentage than stamp duty's 0.5% - but not totally negligible. After taking that into account, your net gain can be expected to be somewhat less than 1.625% - 1% = 0.625% of the holding's capital value per year - maybe 0.5% of the holding's capital value per year.

There's still broker commission to pay - you'll have two selling commissions and two buying commissions to pay per year on the holding. If you pick your moments to trade on all of the trades, you might get the commission costs on the holding down to something around 4 * £10 = £40 per year; if you use various brokers' cheap 'pooled' purchases, you might get them down to around 2 * £10 + 2 * £2 = £24 per year (though at the cost of having less control over exactly when and at what price you repurchase). So if that £40 or £24 per year is more than about 0.5% of the holding's capital value, you can expect to lose more on transaction costs than you save on Income Tax. That means that the holding's capital value needs to exceed around £8k or £4.8k respectively for you to expect to come out ahead at all on Income Tax savings less transaction costs - and to exceed those thresholds by quite a way if you want the amount you expect to come out ahead by to be even mildly significant...

Gengulphus


Thank you for the detailed response.

In my case there is no stamp duty (Irish ETF), my effective tax on dividends is higher than your example and effective CGT is lower, and the bid/offer is quite small, so I think the numbers work.

I appreciate the point about making the tax return more complex, I will think about that.

I was mostly concerned there might be anti-avoidance rules against this, like the CGT rules you mention, but seems like there aren’t any.


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