As a HNW individual with most of his portfolio outside ISA or SIPP wrappers(*) my take on this is as follows.
For my ISA and SIPP investments I couldn't care less about CGT or divi tax obviously. I choose the investment vehicles that I feel best contribute towards my investment goals regardless of dividend characteristics. As it happens my ISA is intended to provide all of my income when I reach my later years, currently I estimate that I will start drawing income from it in 2044 when I will be 85 years old. At that point in time I am anticipating (I hope wrongly!) that I will be far less able to manage any "complicated" (for want of a better word) investment strategy so I am building up an income IT portfolio here to generate what I hope will be reliable monotonically increasing dividends which right now I estimate will be 64% higher than the income I currently live off so I think I'm in good shape.
My taxed portfolio is currently a mixture of growth (passive trackers with a non-UK bias), income ITs (IITs) and HYP shares, the HYP shares being a residue from my earlier investing strategy that was 100% HYP. Here the dividend income, primarily from my IITs and HYP shares, pushes me well into the higher rate tax band so I pay 32.5% tax on a substantial chunk of my divis. I am increasingly trying to skew my taxed investments away from divi generation with a view to at least getting my divi income all within the basic rate 7.5% divi tax band(**).
Once I get all of my divi income within the 7.5% band the comparison is then between how tax efficient are basic rate divis vs higher 20% capital gains tax rate (my cap gains will always be at higher rate since the combination of divis plus capital gains each year would take me back into the higher tax band). There one has to be careful to compare like with like. If I get £100 of spending cash from divis I need to give 7.5% (£7.50) to HMRC. If however I release £100 of spending money from a capital sale I do not have to give 20% (£20) to HMRC unless I acquired the asset for zero cost in the first place, I would only be taxed on the capital gain so it becomes slightly more complex to compare whether sales subject to higher rate CGT are more or less tax efficient than divis at basic rate. (Note that capital gains on regular assets like shares will always be more tax efficient than higher rate divis since the maximum 20% CGT on a sale of an asset with zero purchase cost is still less than the 32.5% tax on higher rate divis let alone additional rate divis.)
The crossover rate for tax on £100 of divis vs £100 of asset sales is an asset sold at 160% of purchase price (for the £100 example bought at £62.50, sold for £100 = 20% tax on £37.50 profit = same £7.50 tax as £100 in dividends - this calculation ignoring trading costs that once one is talking about thousands or tens of thousands rather than hundreds of pounds become pretty irrelevant). Thus if one's growth portfolio sales are tending to be of assets that have appreciated 60% or less since purchase then even the highest rate CGT is more tax-efficient than basic rate divis. If however one's growth portfolio is releasing > 60% CGT then basic rate divis are more tax efficient.
Taking all of the above into account my general tax principle is to drive my divis down into basic rate territory and make use of CGT thereafter. I hasten to add that, as mentioned in one of my footnotes, I would subordinate my tax principles to my investment instincs were I to feel that I was letting the tax tail wag the investment dog but with my current investment strategy I do not consider that to be the case.
Finally, I do of course make full use of all my personal, dividend, cash-interest and capital gains allowances but those are nowhere near enough to shelter the total income+capital gains that I release each year for spending money.
So finally, to answer your question itsallaguess...
Itsallaguess wrote:Which neatly brings me back to the main point of my opening post, which was to ask why, when mention was made of 'minimising taxable events such as dividends', prominence was specifically given to dividends, and why the wording was not simply left at 'taxable events'...
If an investor is top-slicing capital frequently enough such that built in gains were not exceeding 60% at any given time (maybe in some years taking market risk by moving an asset into cash then repurchasing in order to rebase the purchase cost) then I can see why generating CGT events would be preferable to even basic rate divi taxation.
- Julian
(*) Although I have put the maximum I can every year into my ISA every year since they were introduced and also have a small SIPP
(**) Happily for me this isn't a case of the tax tail wagging the investment dog. My growth portfolio has performed very well and I am comfortable with a TR-based passive strategy to generate income so the shift is also for investment reasons.