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The potential influence of 'taxable events' on how we might draw income...

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
Lootman
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Re: The potential influence of 'taxable events' on how we might draw income...

#309659

Postby Lootman » May 18th, 2020, 2:38 pm

Charlottesquare wrote:
Lootman wrote:
dealtn wrote:Of course, and I'm not judging. I suspect for 90%+ that holds. I was just clarifying that it will depend on the individual circumstance. For some in the <10% it may also be a no-brainer, and for some it will be "complicated".

Yes, CGT is generally a bigger problem for those who are fairly wealthy. So by definition that is not a large segment of the population. Although I would expect the number of wealthy folks on a site like this would be high.

I would hazard that anyone with a seven figure taxable portfolio is probably going to worry about CGT more. A mere 1.2% annual gain on a million pound portfolio will increase its value and unrealised gains by more than the annual CGT-free allowance. Each year you will be increasing your potential liability, in normal markets anyway.

Actually I would say for 60 plus high net worth individuals IHT tends to concern them far more than CGT, at least CGT can be washed out on death.

Accordingly when considering investment approaches thoughts should also be given to having income so that normal expenditure out of income gifts can be made to mitigate the future IHT bills (especially if forestry/farmland/AIM shares etc do not really appeal)

Well IHT brings up another whole host of issues of course. Paradoxically ISAs aren't very good for the avoidance of IHT since you cannot gift them. Any ISA you hold when the "taxable event" of death happens is a slam dunk for the taxman. After years of paying no tax on an ISA you get hit for 40% of the lot, or at least your heirs are.

So if IHT is your main concern then at some point you might want to liquidate any ISA and then gift or otherwise fritter away the proceeds.

There isn't the same urgency to liquidate your taxable account for the reason you site - the cost basis is stepped up at death.

Itsallaguess
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Re: The potential influence of 'taxable events' on how we might draw income...

#309688

Postby Itsallaguess » May 18th, 2020, 4:03 pm

dealtn wrote:
Bagger46 wrote:
dealtn wrote:
It is perfectly consistent that even with marginal rates of "dividend" tax being higher than marginal rates of "capital gains" it might be efficient for an individual to shelter the capital gains in an ISA, and have dividends exposed outside of one.

The total potential tax take through gains might exceed that of dividend income.

It isn't a no brainer.


It is for us. And about 90% of the people I know well, I can only post about what I am familiar with.


Of course, and I'm not judging. I suspect for 90%+ that holds. I was just clarifying that it will depend on the individual circumstance. For some in the <10% it may also be a no-brainer, and for some it will be "complicated".


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'...

Cheers,

Itsallaguess

dealtn
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Re: The potential influence of 'taxable events' on how we might draw income...

#309697

Postby dealtn » May 18th, 2020, 4:15 pm

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'...



Well I don't think it was specifically asked of me, but I suspect it is simply because it is, firstly, the most frequent, and additionally the timing is outside of the control of the investor (unlike say choosing to sell at the time of your discretion and choosing when to create a gain - or indeed loss).

Itsallaguess
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Re: The potential influence of 'taxable events' on how we might draw income...

#309709

Postby Itsallaguess » May 18th, 2020, 4:35 pm

dealtn wrote:
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'...


Well I don't think it was specifically asked of me, but I suspect it is simply because it is, firstly, the most frequent, and additionally the timing is outside of the control of the investor (unlike say choosing to sell at the time of your discretion and choosing when to create a gain - or indeed loss).


Of course, from a 'frequency and timing' point of view that all makes sense, but my point above was specifically in relation to Bagger46's welcome input, where he said that he and 90% of the investors he knows (and I believe has close visibility of too, perhaps..) have the majority of major dividend payers inside tax-shelters, where 'frequency and timing' then become completely irrelevant..

Cheers,

Itsallaguess

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Re: The potential influence of 'taxable events' on how we might draw income...

#309712

Postby Alaric » May 18th, 2020, 4:44 pm

Itsallaguess wrote: but my point above was specifically in relation to Bagger46's welcome input, where he said that he and 90% of the investors he knows (and I believe has close visibility of too, perhaps..) has the majority of major dividend payers inside tax-shelters, where frequency and timing then become completely irrelevant in terms of them being 'taxable events'...


My guess would be that it's down to the rate of tax on dividends for those with incomes high enough to be classified as "Additional rate taxpayers". It's 38,1%.

There's no doubt some level of income and taxable wealth where the relative attractions of dividends and capital gains cross over when tax implications are considered.

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Re: The potential influence of 'taxable events' on how we might draw income...

#309734

Postby JuanDB » May 18th, 2020, 6:46 pm

I am an additional rate tax payer and my wife does not work. I’m fortunate that I can fill both our pension and ISA allowances and have a reasonably significant amount of capital free to invest in taxable investments per year. My strategy is as follows.

SIPPs are both focused purely on growth with any dividends being purely incidental.
ISAs are both split between Growth+Income and pure Income investments (largely ITs) to generate a growing income
Her GIA is focussed purely on income ITs up to personal income tax allowance + dividend allowance. Targeting around £250k invested at 5-6% yield.
My GIA has income producing investments upto my dividend allowance. Roughly £30k at 6.5% yield. Everything above this is purely growth focussed.

As any changes are made to the various allowances I will sell or buy the relevant investments to maximise the available allowance. The general strategy being to maximise the income portion of our allowances whether through income or dividends with everything above that geared towards CGT. I suspect others may have a similar split focus.

Cheers,

Juan.

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Re: The potential influence of 'taxable events' on how we might draw income...

#309740

Postby Lootman » May 18th, 2020, 7:08 pm

Alaric wrote:There's no doubt some level of income and taxable wealth where the relative attractions of dividends and capital gains cross over when tax implications are considered.

Exactly. As someone noted earlier it used to be possible to make about 43K a year in dividends and not pay any tax (assuming no other income).

So back then a million pound portfolio in a taxable account would incur no income tax if it yielded 4.3% or so. In that case CGT would easily be the bigger problem as the portfolio would only have to go up 1.2% a year on average to absorb all of the annual CGT-free allowance.

Now dividends are taxed more the calculation will change and that threshold where CGT takes over is perhaps higher for many people. But on the other hand CGT rates have come down from the 40% they used to be. Accepting a 20% CGT hit makes sense to a lot of people at a certain portfolio level. Where that level is varies according to situation.

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Re: The potential influence of 'taxable events' on how we might draw income...

#310495

Postby GrahamPlatt » May 21st, 2020, 7:53 am


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Re: The potential influence of 'taxable events' on how we might draw income...

#310656

Postby 1nvest » May 21st, 2020, 1:39 pm

GrahamPlatt wrote:It’s under discussion here

https://www.theguardian.com/money/2020/ ... ons-income

Same old Labour
Anneliese Dodds, the shadow chancellor, said: “This groundbreaking research demonstrates clearly how capital gains reveal an unequal society and the challenge ahead to undo a decade of rising inequality.

Failing to realise the difference between percentages and values. The top 1% pay something like a third of the tax take. Lower percentage values applied to large amounts is still a good addition to the overall tax revenue. Look to 'equalise' the percentages and that money will largely flight the country, leaving the rest having to find/pay more to fill the hole. Better would be if the 1% were increased to three-fold (3% richest paying relatively low percentages, but that generated enough tax revenue value that the rest didn't have to pay any taxes).

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Re: The potential influence of 'taxable events' on how we might draw income...

#310684

Postby Julian » May 21st, 2020, 3:07 pm

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.


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