The Lemon Fool

My wife is in the enviable position of using up all her tax-free allowance for dividends.
She is moving her shares as fast as possible into an ISA wrapper, but this will still take a few years.

She now has some bank/building-society fixed-term bonds maturing, and doesn't like the pittance they now offer as interest.
How might she reinvest the money from these bonds with a view to the returns being capital gains rather than dividends?

I am reasonably familiar with the high-yield strategy for maximising dividends.
I could suggest picking a spread of lower-yielding FTSE shares, and churning some each year to realise the right amount of capital gain, but she doesn't like to see losses if she happens to look at her portfolio at random intervals (unlike Doris who would never bother to look).

Are there other options for her?
I seem to remember something called a zero, but web searches seem to suggest they had a disaster with "split capital investment trusts" or something like that.

Rover

Rover110 wrote:I seem to remember something called a zero, but web searches seem to suggest they had a disaster with "split capital investment trusts" or something like that.

Zero dividend preference shares is the term. There aren't many left, given that they were issued by split capital investment trusts. Offering a fixed return from equity investments can fail in the event of a collapse of share prices.

Alaric wrote:

Rover110 wrote:I seem to remember something called a zero, but web searches seem to suggest they had a disaster with "split capital investment trusts" or something like that.

Zero dividend preference shares is the term. There aren't many left, given that they were issued by split capital investment trusts. Offering a fixed return from equity investments can fail in the event of a collapse of share prices.

Yes, zeros did have a disaster several years ago, caused by cross-investing, so that when one of them got into difficulties, many others were affected. The rules were changed to avoid a repeat and they have been pretty reliable for several years now, offering a 3 or 4 % yield. You can find details on the AIC website https://www.theaic.co.uk/aic/find-compa ... -analytics. As Alaric said, though, they rely on the soundness of the underlying companies.

If your wife is looking for low yield, low return and low risk investment, then one to consider is Vanguard Lifestrategy 20%. Of course any stock market investment involves some degree of risk, but this is low yield, low risk, low return and a popular multi-asset global fund.

You might also consider growth oriented Investment Trusts.

Alliance
Witan
Foreign & Colonial

are among the ones mentioned on the I.T. board

fca2019 wrote:If your wife is looking for low yield, low return and low risk investment, then one to consider is Vanguard Lifestrategy 20%. Of course any stock market investment involves some degree of risk, but this is low yield, low risk, low return and a popular multi-asset global fund.

According to Hargreaves Lansdown, the distribution from the VLS 20% option (historic 1.5%, expected 1.25%) is of the interest type, and so would be taxed as savings income (which may or may not be good for Mrs. Rover110).Lifestrategy 40% is a dividend payment.

Another possibility is investment trusts aimed at wealth preservation. Capital Gearing Trust has a reputation for low volatility, and a low yield of 0.52%.

I don't know if this link to a list sorted by volatility will work:

https://www.trustnet.com/fund/price-per ... torder=asc

I tried to resolve this issue a few years ago. It would seem obvious from a tax perspective that once you've filled up your ISA allowance, your £2k dividend allowance and maybe your SIPP, the next place to fill would be your capital gains allowance and there would be products desgined specifically for this. However, apparently not. I still haven't found a solution I'm comfortable with.

Zero's would work and I've looked at them many times but the return seems very low when you compare with the underlying security and associated risk. I suspect that the yields on these have been chased by people such as ourselves looking at this very issue. From my perspective everything "fixed interest" has been bid too high imho as investors chase yield and someone is prepared to take more risk than me for the same return.

One suggestion you mention is picking low yielding FTSE shares as a compromise. This would work. One notably company that does this is Wetherspoon (JDW) where the dividend yield is 0.5% and Tim Martin doesn't raise the dividend. His policy to leave his money invested in the company. I don't hold.

I'm sure there are plenty of companies on AIM which are fast growing with little to no dividends. I suspect this probably doesn't fit the profile of substituting a building society bond for something else just to save tax. If you were interested PCF Bank is worth a look. It's expaning rapidly (and profitably) and wishes to retain 90%+ of the profits to be used as reglatory capital so it can continue to expand reducing the burden on shareholders for further cash injections in the future.. It's a minnow though but also useful to avoid IHT if that is an issue. Market cap £80m. I hold.

Rover110 wrote:.....
How might she reinvest the money from these bonds with a view to the returns being capital gains rather than dividends?

.....she doesn't like to see losses if she happens to look at her portfolio at random intervals (unlike Doris who would never bother to look).

Are there other options for her?
....

Investment Trusts! As TUK020 suggests, but there are many more options. Checkout the excellent AIC website.

Many are specifically low or even zero yield - the prime objective being capital growth.

Some years ago, I started to move into ITs. Of the 12 I now hold, just 1 is in the red - and only marginally at that.

Unless one chooses a particularly esoteric one, I think one is much less likely to see significant losses than with individual equities. Barring a market melt-down of course.

Index linked government bonds?

EthicsGradient wrote:..the distribution from the VLS 20% option (historic 1.5%, expected 1.25%) is of the interest type, and so would be taxed as savings income

Please can you provide me a link or explanation. I always thought my VLS 20% was an investment fund paying dividend so distributions (outside of an ISA) would be part of the dividend allowance, not the savings allowance.

JohnW wrote:Index linked government bonds?

They are free of CGT, but at current prices, the returns are lower than inflation.

Thanks very much everyone. That's given us some things to think about.

We'll start by looking at Investment Trusts.

- Rover

JohnW wrote:Index linked government bonds?

Buying something that redeems at 100 for a price higher than 100 doesn't seem a particularly successful strategy for "Investing for Capital Gain" in the "real" world to me.

dealtn wrote:
Buying something that redeems at 100 for a price higher than 100 doesn't seem a particularly successful strategy for "Investing for Capital Gain" in the "real" world to me.

Indexed Bonds redeem at 100 * Index at redemption / Index at issue.

For more recent issues paying coupons of 1/8%, it's the almost the only return the purchaser receives. Risky for a government if it ever lost control of inflation as in much of the period 1970 to 1990.

I have just had a look at the details on Tradeweb.com and every I-L Gilt has a negative redemption yield.

TJH

Rover110 wrote:My wife is in the enviable position of using up all her tax-free allowance for dividends.
She is moving her shares as fast as possible into an ISA wrapper, but this will still take a few years.

She now has some bank/building-society fixed-term bonds maturing, and doesn't like the pittance they now offer as interest.
How might she reinvest the money from these bonds with a view to the returns being capital gains rather than dividends?

I am reasonably familiar with the high-yield strategy for maximising dividends.
I could suggest picking a spread of lower-yielding FTSE shares, and churning some each year to realise the right amount of capital gain, but she doesn't like to see losses if she happens to look at her portfolio at random intervals (unlike Doris who would never bother to look).

Are there other options for her?
I seem to remember something called a zero, but web searches seem to suggest they had a disaster with "split capital investment trusts" or something like that.

Rover

Being brutal there is not an investment that in any way is likely to meet the criteria of not involving the possibility of quotational loss if you look at the portfolio and is likely to have significant capital gains.
If you try and tell your wife otherwise this will be misleading .
Personally I would look at her portfolio as a whole and see what level of risk she is happy with and maybe accept that part of it is in cash /near cash equivalents that could be used for re-balancing in the event of a down-turn.
Saving that a low equity balanced fund such as the Life strategy 20% or a wealth preservation trust such as personal assets or Ruffer may give some opportunity for capital gain with reduced risk of quotational loss, but there will always be some risk.

EthicsGradient wrote:..the distribution from the VLS 20% option (historic 1.5%, expected 1.25%) is of the interest type, and so would be taxed as savings income

fca2019 wrote:Please can you provide me a link or explanation. I always thought my VLS 20% was an investment fund paying dividend so distributions (outside of an ISA) would be part of the dividend allowance, not the savings allowance.

A fund with over 60% of its assets in bonds is counted as paying interest, not dividends.See:

How is the income paid?
Depending on the type of asset that the fund is invested in, it will typically either pay out dividends or interest. If the investments comprise 60% or more in interest yielding assets it will be an interest OEIC or unit trust. The income is classed as savings income for tax purposes.

https://www.pruadviser.co.uk/knowledge- ... t-trusts/#

or:

Distributions paid by Funds that hold more than 60% of their assets in interest-bearing, or economically similar, form at any time in an accounting period are treated as a payment of annual interest for UK resident individual Investors.

https://www.schroders.com/en/mt/profess ... me-tables/

Since the fund's strategy is to be invested 80% in fixed-interest securities, you'd expect its distributions to fall under that "more than 60%" rule, and HL says they do.

EthicsGradient wrote:Since the fund's strategy is to be invested 80% in fixed-interest securities, you'd expect its distributions to fall under that "more than 60%" rule, and HL says they do.

If I understand correctly, the range of Vanguard x% funds are structured as OEICs whilst investing in underlying Vanguard ETFs. That introduces a tax arbitrage possibility as against holding a mix of the ETFs directly. Whether that's useful will depend on an individual's tax position.

Alaric wrote:If I understand correctly, the range of Vanguard x% funds are structured as OEICs whilst investing in underlying Vanguard ETFs. That introduces a tax arbitrage possibility as against holding a mix of the ETFs directly. Whether that's useful will depend on an individual's tax position.

I don't know what "a tax arbitrage possibility" would be. The rules (which Schroders puts as "interest-bearing, or economically similar, form") would seem to cover interest-bearing ETFs too, and Hargreaves Lansdown think so. Vanguard call the distributions from it "interest":

Vanguard LifeStrategy 20% Equity Fund only: interest distributions after 5 April 2017 will be made on a gross basis, without any deduction for income tax.

https://www.vanguard.co.uk/adviser/adv/ ... e=BALANCED

EthicsGradient wrote:I don't know what "a tax arbitrage possibility" would be.

If you hold a Vanguard fund with 40% equity content, it's all treated as interest. If you hold the underlying ETFs as 40% equity and 60% fixed interest, that's treated as 40% dividend and 60% interest. Whether that's good or bad depends on your personal tax position, but it means you can hold investments with a choice on how you are taxed.