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

[nmdhqbc]

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.

No that is not singling out dividends. it says "often". Often does not mean always or even mostly. It is saying some people do this sometimes. Leaving it wide open to other strategies for other people and circumstances.

edit: it also says "such as" so not limiting it to dividends.

[Itsallaguess]

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.

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

Thanks GS, and there's certainly no need to apologise - if there's any misunderstandings anywhere at all, then I'd hope that those might be better understood as part of this discussion..

I was hoping though, that we might be able to concentrate on the tax and 'tax event' side of things with regards to dividends and 'capital raising events' to be honest, without necessarily having the need to raise the dreaded 'H' word, given it's propensity to often derail many discussions to the point where all involved simply wish they'd never bothered, so I do hope that there's enough meat on the tax, 'tax event' and dividend/capital-raising side of things, and certainly relating to what can be quite a large advantage in that tax side of things which can potentially be delivered by long-term use of the ISA allowances, to allow us to continue discussing those particular points without necessarily getting into a pointed discussion around 'strategy-specific' approaches..

Cheers,

Itsallaguess

[mc2fool]

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.

For people in that position the situation is much worse than it was prior to 2016, when the dividend allowance with introduced and the (totally notional) dividend tax credit was dropped, and the effective tax on dividends for basic rate taxpayers was raised from 0% to 7.5%.

In 2015/16, if it was your only income, you could have received £41,325 of dividends free of any income tax. This current tax year you'd be paying £2,011.87 on that. YMMV.

[1nvest]

Dividend seeking inside of ISA is fine if that is your preference. But it is concentrated and avoidance of concentration risk is a key factor for higher worth individuals. If so desired, including dividend seeking as part of a broader asset allocation is fine. Typically cost/tax reduction elements arise from a wide range of options and utilising many/all of those is better than not.

For higher worth individuals liquidity and counter party risk factors need to be considered. Rapidly liquidating perhaps 30 different 9 to 5 weekday traded stocks to move the sale proceeds elsewhere is riskier than liquidating a single/few 24/7 traded asset(s).

Income production diversification from across multiple assets (30 stocks/whatever) can equally be achieved by taking income out of total returns/fewer assets to equal effect, but where that income can be fine tuned to when and how much you want. Investing in a specific manner such as how income is being paid or can be drawn has no right or wrong answer, its just a personal preference. One factor investors can directly address is cost/tax reduction – for instance selecting the method of income production for themselves that is the more tax efficient (higher net benefit), that may comprise a number of choices.

For very high net worth individuals large dividends can be a problem. If its not income they need then taxable income generation events are a potential liability/cost. It’s all relative. There is no single answer to how much more of a problem it generally is or at what level of wealth – as that’s variable.

[Alaric]

certainly relating to what can be quite a large advantage in that tax side of things which can potentially be delivered by long-term use of the ISA allowances,

I don't see much need or debate about whether to utilise the annual £ 20,000 ISA allowance. One possible point is as to whether the charges made by providers exceed the potential tax savings.

It's a question of what to do when the available funds exceed both that allowance and the parallel allowances for SIPP contributions.

An investor who knew that out of every £ 100 of dividend income, £ 38.10 would have to be handed back in a Tax Return, might be tempted to sort a list of shares for potential purchase by ascending dividend yield with a view to exploiting the slightly more benign Capital Gains Tax regime if at all possible.

[1nvest]

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.

Splitting assets between taxable and non taxable is standard practice for higher net wealth individuals who cannot squeeze it all into non-taxable. If you hold the same assets both within and outside of tax efficient then its just a rebalance factor. For similar assets (individual stocks) its reactive not predictive. If dissimilar assets (stocks and bonds for example) it is predictive (i.e. do you sell all of stock A outside of ISA and sell a similar value of bonds inside of ISA to buy bonds outside of ISA, buy the stock A inside ISA - such that you hold more bonds outside of ISA than before). Like any other tax saving option, you either utilise it, or typically lose it. Cost averaging up the average cost of stock via tax harvesting can lead to a lower tax hit if/when a forced return of capital occurs. Whether its cost/tax efficient to do so is specific to the actual levels.

Some become tied into individual assets, along the lines of they'd like to sell but would incur a large tax liability if they did. Enslaved, with a penalty to escape that enslavement. But where had they taxed harvested the penalty might have been much lower, if any at all.

[johnhemming]

One possible point is as to whether the charges made by providers exceed the potential tax savings.

I have not studied the issue of charges more generally, but some brokers don't charge specifically for holding stocks in an ISA (beyond what they charge for holding stocks).

[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.

Splitting assets between taxable and non taxable is standard practice for higher net wealth individuals who cannot squeeze it all into non-taxable. If you hold the same assets both within and outside of tax efficient then its just a rebalance factor. For similar assets (individual stocks) its reactive not predictive. If dissimilar assets (stocks and bonds for example) it is predictive (i.e. do you sell all of stock A outside of ISA and sell a similar value of bonds inside of ISA to buy bonds outside of ISA, buy the stock A inside ISA - such that you hold more bonds outside of ISA than before). Like any other tax saving option, you either utilise it, or typically lose it. Cost averaging up the average cost of stock via tax harvesting can lead to a lower tax hit if/when a forced return of capital occurs. Whether its cost/tax efficient to do so is specific to the actual levels.

Some become tied into individual assets, along the lines of they'd like to sell but would incur a large tax liability if they did. Enslaved, with a penalty to escape that enslavement. But where had they taxed harvested the penalty might have been much lower, if any at all.

I think you missed the attempted humour. I will try harder.

[1nvest]

The last number of decades have seen lowering of taxation/increases of allowances. Stability/lower inflation induces lower taxation. In times of crisis taxation tends to rise along with inflation/interest rates.

High worth might be considered as being above the level at which paying taxes becomes mandatory, isn't optional. Without going into details that might give the taxman a pointer to easy targets I'd put that at £3M to £5M. Under less stable times that could drop massively and I'd suggest that is the era we're now approaching. The natural tendency is that higher worth individuals will flight capital rather than being reduced down to substantially below being high worth.

The UK government is increasingly being recognised as being less safe, tends to induce instability and often managing crises of its own making. Prior generations had the security of a shared cost health care such that individuals weren't overburdened in the event of a family members illness and where late life retirement funding was similarly shared. Increasingly the burden has been transferred onto individuals and those past built up benefits are being plundered (selling off of NHS, raiding of pension funds etc.). I suspect ISA's are not outside of that and that sooner or later will be 'reviewed'.

The question to ask oneself is how much of a hit would I endure if for instance ISA allowances were revised heavily down (along with taxes being substantially increased) in order to flight in a era of the return of capital being a priority over the return on capital. Being unpredictable that involves diversification. High net worth investing involves seeking out higher frequency of small hits rather than a less frequent but larger single hit. A large proportion of income from one source/location such as HYP within a ISA isn't diversified and may not be liquid enough. You don't want to be 10 years or whatever into retirement finding that you are enslaved, trapped in by high cost/taxation to move your investments along with much/all of the actual benefits being taken in tax/costs for the benefit of others under a state system inclined to be good as spending other peoples money.

1968 is the most extreme case I can recall from history, when the then Labour Chancellor Roy Jenkins applied retrospective taxation that lifted higher rate tax up to 130% levels. In years around that the Beatles were singing Taxman, in reflection of 95% tax rates (19 for you, 1 for me, taxman). In the 1970's whilst inflation was high and interest rates were also high such that they seemed to offset each other, basic rate taxation was also high such that in real terms wealth was confiscated, albeit progressively rather than as a result of a single hit.

[Itsallaguess]

Dividend seeking inside of ISA is fine if that is your preference. But it is concentrated and avoidance of concentration risk is a key factor for higher worth individuals. If so desired, including dividend seeking as part of a broader asset allocation is fine. Typically cost/tax reduction elements arise from a wide range of options and utilising many/all of those is better than not.

For higher worth individuals liquidity and counter party risk factors need to be considered. Rapidly liquidating perhaps 30 different 9 to 5 weekday traded stocks to move the sale proceeds elsewhere is riskier than liquidating a single/few 24/7 traded asset(s).

For very high net worth individuals large dividends can be a problem. If its not income they need then taxable income generation events are a potential liability/cost. It’s all relative. There is no single answer to how much more of a problem it generally is or at what level of wealth – as that’s variable.

and..

High worth might be considered as being above the level at which paying taxes becomes mandatory, isn't optional. Without going into details that might give the taxman a pointer to easy targets I'd put that at £3M to £5M. Under less stable times that could drop massively and I'd suggest that is the era we're now approaching. The natural tendency is that higher worth individuals will flight capital rather than being reduced down to substantially below being high worth.

The UK government is increasingly being recognised as being less safe, tends to induce instability and often managing crises of its own making. Prior generations had the security of a shared cost health care such that individuals weren't overburdened in the event of a family members illness and where late life retirement funding was similarly shared. Increasingly the burden has been transferred onto individuals and those past built up benefits are being plundered (selling off of NHS, raiding of pension funds etc.). I suspect ISA's are not outside of that and that sooner or later will be 'reviewed'.

The question to ask oneself is how much of a hit would I endure if for instance ISA allowances were revised heavily down (along with taxes being substantially increased) in order to flight in a era of the return of capital being a priority over the return on capital. Being unpredictable that involves diversification. High net worth investing involves seeking out higher frequency of small hits rather than a less frequent but larger single hit.

A large proportion of income from one source/location such as HYP within a ISA isn't diversified and may not be liquid enough. You don't want to be 10 years or whatever into retirement finding that you are enslaved, trapped in by high cost/taxation to move your investments along with much/all of the actual benefits being taken in tax/costs for the benefit of others under a state system inclined to be good as spending other peoples money.

Well, your £3m to £5m ballpark with regards to what 'High net worth' means is useful, so thanks for that, although I'd then have to ask how much of the Lemon Fool audience might fall into that category, but you might consider that by the by..

Your replies above do seem to accept that for those of perhaps lower means, dividend 'tax event's can be somewhat mitigated and perhaps even ignored for those of us lucky enough to have been able to utilise many year's worth of ISA allowances, so I'm grateful that you're able to recognise that, whilst I do accept your important point about concentration-risk..

I would question the mention of specific dangers that 'large dividends' might bring to high net worth investors though, when we consider that nowhere in the above passages is the recognition that there is also likely to sometimes be a comparable 'dangers' of things like forced take-overs and the like, along with other 'capital-related' taxable events, so I think it's important to balance out these risk-based discussions in a fair way, without specific concentration on just one aspect of such tax-related 'dangers'..

Regarding your second points quoted above, I'd have to agree that ISA's run the constant risk of 'attracting unwanted attention' from those seeking access to capital, but again, I think it's important to also appreciate that it's likely that almost all aspects of UK-investor 'tax-processes', along with any potential 'current' ways to mitigate such 'tax processes', are likely to always be under constant scrutiny and review by one tax-office sub-committee or other, and at the very least we might be able to agree that one key benefit of ISA's, with regards to the potential for 'dipping raids', is that a single rule-change there will almost certainly affect the voter that's attached to that ISA, and so there's a twin-edged 'big pot vs strength in voter numbers' issue going on there, that I'm sure causes some regular 'pauses' in many 'tax-raid' sub-committee discussions..

One example of this wider risk, that's non-ISA related, is the recent IR35 changes that were planned to go through before the Covid-19 crisis delayed it - I've seen some work colleagues age considerably over the past 12 months just on this specific matter alone, so there's tax-risk all around us constantly, as workers and as investors, and that tax-risk doesn't *just* live in the ISA area alone...

But the bottom line, again, is that I think it's only fair to balance out the 'ISA's can be raided at any time' view with the fact that there's *lots* that we might be able to consider if we're painting broad 'capital raid' pictures with these discussions, with many potential sources of capital well away from ISA pots, and so we perhaps shouldn't paint too bleak a picture just for those of us with smaller pots than £3m to £5m sitting there in our ISA's, who are perhaps quite content with working as we can within the allowed tax-free framework, and finding ways to largely satisfy our meagre wants and desires from our investments..

If those risks then become a much bigger issue for those investors lucky enough to be having to deal with £3m to £5m pots and over, then I think that's where the 'nice problem to have' phrase pops it's head around the door and says 'Hi'...

Thanks again for a set of generous responses 1nvest, and it's appreciated that you saw the wider points I was trying to tease out here.

Cheers,

Itsallaguess

[Lootman]

Dividend seeking inside of ISA is fine if that is your preference.

I notice a lot of people try and locate higher-yielding securities in their ISA based on the assumption that will save them income tax on those dividends.

It will but it comes with an opportunity cost if the unsheltered positions accumulate larger unrealised gains, which seems likely since lower-yielding shares are typically more likely to grow faster.

The structure of my investments is now such that I have more of a capital gains problem than an income tax problem. So for me it makes more sense to have higher yielders in my taxable account and use my ISA for growth names. At some level of portfolio amount, CGT can be a bigger problem than income tax, even though of course you can usually control when you take those gains.

I also take gains each year in excess of the CGT-free allowance, since I don't see CGT rates going any lower, but they could easily go higher.

[tjh290633]

With regard to your comment in the opening post, all my investments bar one are inside what are now ISAs. My estmate is that had I taken full advantage of the use of PEPs, Single Company PEPs, Tessas and ISAs, I could have put about £320k for each of my wife and myself into tax shelters. Given the same return that I achieved with what I did invest, the resultant value would have been in excess of £8 million.

Needless to say, I did not.

TJH

[Lootman]

With regard to your comment in the opening post, all my investments bar one are inside what are now ISAs. My estmate is that had I taken full advantage of the use of PEPs, Single Company PEPs, Tessas and ISAs, I could have put about £320k for each of my wife and myself into tax shelters. Given the same return that I achieved with what I did invest, the resultant value would have been in excess of £8 million.

Needless to say, I did not.

I have maxxed out subscriptions to PEPs and ISAs since their inception, with the exception of single company PEPs when they were around. Subscribed to the max since 1987.

I am at about £800K now. So evidently your are ten times as good an investor as I am

[tjh290633]

I have maxxed out subscriptions to PEPs and ISAs since their inception, with the exception of single company PEPs when they were around. Subscribed to the max since 1987.

I am at about £800K now. So evidently your are ten times as good an investor as I am

Apologies, that figure should be £2.8 million. Bear in mind that is for a couple. I have also been withdrawing cash from time to time, and erroneously deducted that from the input figure. I can now see a further anomaly, so forget I ever spoke about the current value.

TJH

[Bagger46]

I have maxxed out subscriptions to PEPs and ISAs since their inception, with the exception of single company PEPs when they were around. Subscribed to the max since 1987.

I am at about £800K now. So evidently your are ten times as good an investor as I am

Apologies, that figure should be £2.8 million. Bear in mind that is for a couple. I have also been withdrawing cash from time to time, and erroneously deducted that from the input figure. I can now see a further anomaly, so forget I ever spoke about the current value.

TJH

That latest figure of TJH is very near to our net return over our two ISAs as at end 2019. Net of capital injected, which has averaged 97% of max contributions since the beginning of PEPs. At that stage 49% cumulatively came from dividends. Average yield over our two ISA had been 4.05% over that long period, as measured from the ratios( (1+acc%)/(1+inc%)-1 )of % compound growth of acc units to inc units, ie the intrinsic yield of the portfolios, our preferred measure of portfolio yield over longish periods, mine yielding much lower and with the better returns, as we would have generally expected.

Needless to say capital is lower now, 16.5% down YTD over the two ISAs. My slightly larger taxed portfolio has yet again held up much better, 6.7% down YTD, being US/disruptors/small Cos heavy.

My view on tax is that, as in the old saying, it is better to have to pay some than not. We concentrate shares yielding better in the ISAs tax shelter, a no brainer imho (until rules change of course).

Bagger

I am not much of a trader these days, but March/April saw me make well over 100 shortish smallish trades, as the opportunities abounded. Much of it by setting market orders in the dead of the night(sleep does not come easy for some of us oldies), as I have been very busy indeed helping one of our daughters try to salvage her covid ravaged businesses during the day, so much for so called retirement!

[dealtn]

We concentrate shares yielding better in the ISAs tax shelter, a no brainer imho (until rules change of course).

As I think has been pointed out already, that is just an opinion, and depends on the individual.

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.

[Bagger46]

We concentrate shares yielding better in the ISAs tax shelter, a no brainer imho (until rules change of course).

As I think has been pointed out already, that is just an opinion, and depends on the individual.

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.

Bagger

[dealtn]

We concentrate shares yielding better in the ISAs tax shelter, a no brainer imho (until rules change of course).

As I think has been pointed out already, that is just an opinion, and depends on the individual.

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.

Bagger

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".

[Lootman]

As I think has been pointed out already, that is just an opinion, and depends on the individual.

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".

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.

[Charlottesquare]

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".

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)