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

[Itsallaguess]

I've started this thread as a side-shoot to a discussion around 'Total Return', where 1nvest mentioned how he thinks that the specific influence of 'taxable events' might steer an investor towards preferring to take income from capital rather than dividends -

High net worth investors often look to minimise taxable events such as dividends.

They don't want forced returns of capital (such as dividends) and would rather just sell enough shares/assets to generate their own 'dividend' out of total return.

https://www.lemonfool.co.uk/viewtopic.php?f=21&t=23356&start=120#p309242

On this thread, I would like to investigate if the basis for the above opinion is as clear cut as 1nvest seems to indicate, without spoiling the above 'Total Return' thread with another off-topic discussion.

My questions for 1nvest would be -

1. Given that both capital gains and dividends can be ignored for tax-purposes where they might occur within an ISA wrapper, and given the length of time such ISA wrappers (or their earlier equivalents) have been available for long-term investors to utilise, how much more of a 'taxable event problem' do you think dividends are to many 'long-term high net worth' investors, over and above any potential 'capital harvesting' processes, which may equally be described as 'taxable events', but don't seem to influence your thoughts on this matter in the same way?

2. Is your 'dividend taxable-events (bad) vs capital-harvesting taxable events (good)' view specifically driven by those who you only might consider to be 'High net worth investors', and would you consider the same comparison to be of much less importance for investors that might not consider themselves 'High net worth', but are still looking to provide some or all of their future income by way of ISA dividends, rather than non-ISA dividends?

The reason that I ask the above is that whilst I wouldn't consider myself to be a 'High net worth investor' when compared to many other investors on this site, I do think the medium-term outlook that I'm aiming for is hopefully looking to provide me with a tax-free dividend income that's going to cover a large proportion of my post-retirement income requirements, and, specifically, that's likely to be achieved without being concerned at all about those dividends giving me any 'taxable events' outside of the current £2,000 dividend allowance...

So whilst I may not be 'High net worth' to some here, I would certainly consider myself to be 'High-enough net worth' for that situation to be favourable for me in the way I wish to take my future dividend income, and it seems that you think that 'dividend taxable events' should influence me not to think that way.

Can you please explain why?

Cheers,

Itsallaguess

[Itsallaguess]

Apologies - I also meant to add to the above post that, of course, wider views on this subject are to be invited, even though my original question was raised with 1nvest on the above post.

I would especially like to hear from any income-investors for whom 'dividend taxable events' are perhaps not an issue at all, and yet who derive large proportions of their income from those dividends..

Cheers,

Itsallaguess

[Alaric]

about those dividends giving me any 'taxable events' outside of the current £2,000 dividend allowance...

Back of a envelope calculation. How to generate £ 2000 in dividend income? Multiply it by 20 ( equivalent to 5% return). That gives an asset value of £ 40,000, so the price of a posh new car. Anything above that is taxed, albeit at low levels for a basic rate taxpayer.

You also get £ 2,000 with a 1% return on £ 200,000 which is perhaps what an investor for capital gain might experience.

[Itsallaguess]

about those dividends giving me any 'taxable events' outside of the current £2,000 dividend allowance...

Back of a envelope calculation. How to generate £ 2000 in dividend income? Multiply it by 20 ( equivalent to 5% return). That gives an asset value of £ 40,000, so the price of a posh new car. Anything above that is taxed, albeit at low levels for a basic rate taxpayer.

You also get £ 2,000 with a 1% return on £ 200,000 which is perhaps what an investor for capital gain might experience.

I'm not quite sure what relevance that's got to the question being asked or the point being made, which is to say that for many long-term investors, it's quite possible to get large amounts of their net-worth inside of ISA wrappers over a number of years, and then grow that income and capital from within those ISA wrappers, in a way that sometimes makes the current £2,000 dividend allowance limit almost an irrelevance in terms of the overall 'non-tax-event' ISA dividends that might then be available from such an approach...

That's certainly looking to be the case with my own projections, and so I wondered why 1nvest thought that it might be so important to him that he wants to think of dividend 'taxable events' being such an important and negative driver in his thinking, over and above any potential for capital-raising 'taxable events' instead, which he seems to think of as being much less of an issue..

Cheers,

Itsallaguess

[GoSeigen]

2. Is your 'dividend taxable-events (bad) vs capital-harvesting taxable events (good)'

FWIW I think you might be misunderstanding/misrepresenting 1nvest's views here. My understanding is that it's:

2. 'dividend taxable-events alone (ok) vs choice of 'dividend taxable-events or capital-harvesting taxable events (good)

In other words I think he's saying its nice to be able to choose and he feels strategies like HYP which preclude making sales or indeed viewing investment entirely through an income prism are limiting to people whose tax situation needs close management.

I am also interested in 1nvest's response to the broad thrust of what you're asking. Hopefully he'll respond soon.


GS
P.S. Apols if I'm the one who' misunderstood!

[nmdhqbc]

If your net worth is high enough that you end up with such large amounts outside of tax wrappers then I can indeed see why minimising dividends in favour of capital gains outside wrappers makes sense. I don't think 1nvest explicitly said they need to think like that just that often some people do. Just because a lot of people do not need to worry about it does not mean it's not a factor for others to take into consideration. I don't think 1nvest ever suggested you personally need to take action in this way but you seem to be demanding an explanation as if they did.

[johnhemming]

Another issue that is relevant to drawing cash from investments is the transactional cost itself. A dividend generally does not have such a cost, but if you are selling shares to the market that the company is buying back then there is a transactional cost. For larger investments selling part of the investment can be done in a cost effective manner.

This tends to lead into the debate about buybacks. If a company has more capital than it needs I think buybacks where the share price is low enough are a good idea. Buy backs below net asset value per share are potentially particularly cost effective. Also where profits are lumpy buy backs can be a better idea than a special dividend.

[Alaric]

I'm not quite sure what relevance that's got to the question being asked or the point being made, which is to say that for many long-term investors, it's quite possible to get large amounts of their net-worth inside of ISA wrappers over a number of years,

There are a number of ways people can come into a one-off lump sum well exceeding what can be put immediately into an ISA or even a SIPP. There's inheritance, sale of a business, redundancy pay off, pension commencement lump sum to name a few. The original Bland articles advocating investment in high yield shares and how to select them were aimed at investors in that position. At the time they were written, the ISA limit was much lower, but there wasn't additional tax on dividends unless income from all sources reached the Higher Rate threshold. Potential tax disadvantage in his proposal could reasonably be ignored.

In other words I think he's saying its nice to be able to choose and he feels strategies like HYP which preclude making sales or indeed viewing investment entirely through an income prism are limiting to people whose tax situation needs close management,

Exactly!

There's one other thought, that the personal allowance now gives a generous tax free return on dividends, but only when they represent much of an individual's income.

[Itsallaguess]

If your net worth is high enough that you end up with such large amounts outside of tax wrappers then I can indeed see why minimising dividends in favour of capital gains outside wrappers makes sense.

I don't think 1nvest explicitly said they need to think like that just that often some people do. Just because a lot of people do not need to worry about it does not mean it's not a factor for others to take into consideration.

I don't think 1nvest ever suggested you personally need to take action in this way but you seem to be demanding an explanation as if they did.

And I hope that I've not said that 1nvest is suggesting anything to me 'personally', and I'm not 'demanding' any explanation at all - I'm just hopeful of a wider and separate discussion on something that's been raised a number of times recently, and which I'm interested in, around the potential terms of the 'when and why's' of it becoming a 'driver' in the way that 1nvest has suggested...

Of course your point about potentially being in a position where your net worth is high enough where large amounts might end up outside of tax wrappers is a valid one, but that's not specifically been mentioned, and it's that sort of detail that I was hoping to tease out, as it's clearly 'possible' to think of oneself as 'high net worth', but have large proportions of that 'worth' inside tax-wrappers too, where 'taxable event's' don't exist in terms of this discussion, and my specific questions is that where they might not exist, then is one approach still more 'preferable' than the other?..

Hypothetically, if we end up agreeing that, actually, 'dividend taxable events' aren't always an issue, and what issues they might present can be managed away by the use of ISA allowances over many years, and they really might only become an issue if we're either talking about potentially managing a single lump sum that's not currently inside a tax-wrapper, or it might be the case that those 'dividend tax events' only really become an issue once you've got over (say..) £1million invested in the market, then that's the sort of discussion I was hoping to have - just to see what 'High net worth' actually meant, and if that was a primary driver in taking this view on 'dividend taxable event's', perhaps go on to agree that for many, many income-investors on this site, 'dividend taxable event's' might not be an issue at all, given that many of us will have utilised ISA allowances over the years in a way that means they don't even trigger taxable-events...

Cheers,

Itsallaguess

[TUK020]

I've started this thread as a side-shoot to a discussion around 'Total Return', where 1nvest mentioned how he thinks that the specific influence of 'taxable events' might steer an investor towards preferring to take income from capital rather than dividends -

High net worth investors often look to minimise taxable events such as dividends.

They don't want forced returns of capital (such as dividends) and would rather just sell enough shares/assets to generate their own 'dividend' out of total return.

https://www.lemonfool.co.uk/viewtopic.php?f=21&t=23356&start=120#p309242

On this thread, I would like to investigate if the basis for the above opinion is as clear cut as 1nvest seems to indicate, without spoiling the above 'Total Return' thread with another off-topic discussion.

My questions for 1nvest would be -

1. Given that both capital gains and dividends can be ignored for tax-purposes where they might occur within an ISA wrapper, and given the length of time such ISA wrappers (or their earlier equivalents) have been available for long-term investors to utilise, how much more of a 'taxable event problem' do you think dividends are to many 'long-term high net worth' investors, over and above any potential 'capital harvesting' processes, which may equally be described as 'taxable events', but don't seem to influence your thoughts on this matter in the same way?

2. Is your 'dividend taxable-events (bad) vs capital-harvesting taxable events (good)' view specifically driven by those who you only might consider to be 'High net worth investors', and would you consider the same comparison to be of much less importance for investors that might not consider themselves 'High net worth', but are still looking to provide some or all of their future income by way of ISA dividends, rather than non-ISA dividends?

The reason that I ask the above is that whilst I wouldn't consider myself to be a 'High net worth investor' when compared to many other investors on this site, I do think the medium-term outlook that I'm aiming for is hopefully looking to provide me with a tax-free dividend income that's going to cover a large proportion of my post-retirement income requirements, and, specifically, that's likely to be achieved without being concerned at all about those dividends giving me any 'taxable events' outside of the current £2,000 dividend allowance...

So whilst I may not be 'High net worth' to some here, I would certainly consider myself to be 'High-enough net worth' for that situation to be favourable for me in the way I wish to take my future dividend income, and it seems that you think that 'dividend taxable events' should influence me not to think that way.

Can you please explain why?

Cheers,

Itsallaguess

Not such an outlandish possibility given the way that our tax system is structured. You don't have to be a high net worth individual to hit tax distorting incentives in this way.

People often have quite a narrow window of opportunity when they are at their earnings prime, and have cleared other financial commitments - mortgage, school fees, university support - and want to squirrel away sums of money to prepare for retirement.

If you earn 100k/yr, you are then on a marginal tax & NI rate of 62%. The obvious thing to do is to salt away as much as possible into pension. Until you hit the Lifetime Allowance (LTA). Then you want to shove everything into an ISA, even if you have been unable to put anything like the limit into an ISA for the last 20 years.

I am subject to what I consider penal and incentive destroying levels of income tax. I have never been subject to capital gains tax. Anything that I can put aside over the 20k/yr limit on ISA needs to be invested in something that will provide capital gain, not income.

Side note: I know people who have worked and earned abroad, for whom the above situation is compounded by the fact that ISAs were not available to them while not a UK resident taxpayer.

[nmdhqbc]

And I hope that I've not said that 1nvest is suggesting anything to me 'personally', and I'm not 'demanding' any explanation at all -

See below you say exactly that and then ask for an explanation. Demand was too strong a word from me i suppose...

So whilst I may not be 'High net worth' to some here, I would certainly consider myself to be 'High-enough net worth' for that situation to be favourable for me in the way I wish to take my future dividend income, and it seems that you think that 'dividend taxable events' should influence me not to think that way.

Can you please explain why?

Of course your point about potentially being in a position where your net worth is high enough where large amount might end up outside of tax wrappers is a valid one, but that's not specifically been mentioned, and it's that sort of detail that I was hoping to tease out, as it's clearly 'possible' to think of oneself as 'high net worth', but have large proportions of that 'worth' inside tax-wrappers too...

Hypothetically, if we end up agreeing that, actually, 'dividend taxable events' aren't always an issue, and what issues they might present can be managed away by the use of ISA allowances over many years, and they really might only become an issue if we're either talking about managing a single lump sum that's not currently inside a tax-wrapper, or it might be the case that those 'dividend tax events' only really become an issue once you've got over (say..) £1million invested in the market, then that's the sort of discussion I was hoping to have - just to see what 'High net worth' actually meant, and if that was a primary driver in taking this view on 'dividend taxable event's', perhaps go on to agree that for many, many income-investors on this site, 'dividend taxable event's' might not be an issue at all, given that many of us will have utilised ISA allowances over the years in a way that means they don't even trigger taxable-events...

I don't think 1nvest said anything that contradicts this. All they said was often high net worth folks want to manage tax like this. Never that it will happen a lot or a high % of time. "Often" to me does not mean a high % of occurences. I might say I often go to the shop to buy groceries but that's maybe 1 hour a week = 1/(24*7) = 0.6% of the week.

[Itsallaguess]

Of course your point about potentially being in a position where your net worth is high enough where large amount might end up outside of tax wrappers is a valid one, but that's not specifically been mentioned, and it's that sort of detail that I was hoping to tease out, as it's clearly 'possible' to think of oneself as 'high net worth', but have large proportions of that 'worth' inside tax-wrappers too...

Hypothetically, if we end up agreeing that, actually, 'dividend taxable events' aren't always an issue, and what issues they might present can be managed away by the use of ISA allowances over many years, and they really might only become an issue if we're either talking about managing a single lump sum that's not currently inside a tax-wrapper, or it might be the case that those 'dividend tax events' only really become an issue once you've got over (say..) £1million invested in the market, then that's the sort of discussion I was hoping to have - just to see what 'High net worth' actually meant, and if that was a primary driver in taking this view on 'dividend taxable event's', perhaps go on to agree that for many, many income-investors on this site, 'dividend taxable event's' might not be an issue at all, given that many of us will have utilised ISA allowances over the years in a way that means they don't even trigger taxable-events...

I don't think 1nvest said anything that contradicts this.

All they said was often high net worth folks want to manage tax like this. Never that it will happen a lot or a high % of time. "Often" to me does not mean a high % of occurrences.

And it's precisely that sort of detail that I was hoping to tease out of this thread - just what *is* meant by 1nvest's - 'High net worth investors often look to minimise taxable events such as dividends"?

I'd like to ask, is it equally as valid to say that "High net worth investors often look to minimise taxable events such as raising capital"?

And if that's so, then why not simply say "High net worth investors often look to minimise taxable events", and leave it at that, whilst also acknowledging that for many long-term investors, dividends or capital-raising tasks won't incure *any* 'taxable events', given the access to ISA allowances that have been available for many years...

My point was that to continually single out 'potential taxable events' for dividends seems disproportionate, and if there's a reason why this is the case, then I'm interested to tease that reasoning out if possible...

Cheers,

Itsallaguess

[dealtn]

Quite handy having capital losses outside my ISA at the moment.

If only I had a way of knowing in advance which investments would provide gains, and which losses, to help decide where to locate them.

[nmdhqbc]

My point was that to continually single out 'potential taxable events' for dividends seems disproportionate, and if there's a reason why this is the case, then I'm interested to tease that reasoning out if possible...

No-one was suggesting anyone singles out anything. It was just a possibility depending on the circumstances of someones tax affairs. I think you've got the wrong end of the stick from 1nvest's comment and are preaching to the choir.

[GrahamPlatt]

Quite handy having capital losses outside my ISA at the moment.

If only I had a way of knowing in advance which investments would provide gains, and which losses, to help decide where to locate them.

Handy that is if you have any gains left to offset against!

[dealtn]

Quite handy having capital losses outside my ISA at the moment.

If only I had a way of knowing in advance which investments would provide gains, and which losses, to help decide where to locate them.

Handy that is if you have any gains left to offset against!

Yes, but I am confident, as always, in my ability to pick the right stock to generate those!

[Itsallaguess]

My point was that to continually single out 'potential taxable events' for dividends seems disproportionate, and if there's a reason why this is the case, then I'm interested to tease that reasoning out if possible...

No-one was suggesting anyone singles out anything. It was just a possibility depending on the circumstances of someone's tax affairs.

But 1nvest's quote on my opening post on this thread does indeed single dividends out - he mentions them specifically twice...

Here it is again -

High net worth investors often look to minimise taxable events such as dividends.

They don't want forced returns of capital (such as dividends) and would rather just sell enough shares/assets to generate their own 'dividend' out of total return.

When you say 'it was just a possibility depending on the circumstances of someone's tax affairs', well, that's entirely my point in asking why dividends are mentioned specifically, twice, when all you seem to think it means is 'minimise any taxable event'..

But why no mention of 'capital raising' being a potentially 'taxable event'?

Why no mention of 'take-overs' being a potentially 'taxable event'?

Of course, there's no specific need to mention all the various potential 'taxable events', and it's quite possible just to say 'High net worth investors often look to minimise taxable events' without specifically mentioning any of them, but that's not what seems to be happening when this point has been raised recently by him....

I think you've got the wrong end of the stick from 1nvest's comment and are preaching to the choir.

And that's quite possible..

If only there was a way that I might be able to discuss the reasoning behind what he's said, so that we might find out if that's the case...

Cheers,

Itsallaguess

[Itsallaguess]

If you earn 100k/yr, you are then on a marginal tax & NI rate of 62%. The obvious thing to do is to salt away as much as possible into pension. Until you hit the Lifetime Allowance (LTA). Then you want to shove everything into an ISA, even if you have been unable to put anything like the limit into an ISA for the last 20 years.

I am subject to what I consider penal and incentive destroying levels of income tax. I have never been subject to capital gains tax. Anything that I can put aside over the 20k/yr limit on ISA needs to be invested in something that will provide capital gain, not income.

Side note: I know people who have worked and earned abroad, for whom the above situation is compounded by the fact that ISAs were not available to them while not a UK resident taxpayer.

Oh absolutely - there's going to be cases where individuals needs to manage their financial affairs in a particular way that suits their own situation, and I hope there's nothing in what I've said or asked that contradicts that.

Cheers,

Itsallaguess

[scrumpyjack]

Certainly I, like Tuk, am in the position where tax is an important consideration in the optimum type of return, having put the maximum in ISA's and pensions. So 62% or 45% tax on the whole of a dividend is less desirable than CGT of 20% on the gains element of a capital return.

However compared to the 98% tax on dividends (over 100% one year!) that was the case in my youth, today's rates are still relatively mild (for the present!)

[dealtn]

Certainly I, like Tuk, am in the position where tax is an important consideration in the optimum type of return, having put the maximum in ISA's and pensions. So 62% or 45% tax on the whole of a dividend is less desirable than CGT of 20% on the gains element of a capital return.

However compared to the 98% tax on dividends (over 100% one year!) that was the case in my youth, today's rates are still relatively mild (for the present!)

It's not just the (marginal) tax rates though, it is also the ability to time when they occur. I can't influence the date when I receive a dividend. I do have some control over when I create a capital gain (or loss).