Noob questions about non-sheltered investments

[AppleCrumble]

I've only invested in ISAs and SIPPs so far but now I have a lump sum that I want to invest in a non-sheltered investment account. There are a couple of things I'd like to know beforehand.

I've seen people recommend to use income rather than accumulation as it makes it much easier to separate dividends from capital gains for tax purposes. Is that good advice worth following? Is it difficult to derive this information from accumulation?

Where do dividends usually get paid to? As cash in the investment account? Or direct to a bank acccount?

[dspp]

I've only invested in ISAs and SIPPs so far but now I have a lump sum that I want to invest in a non-sheltered investment account. There are a couple of things I'd like to know beforehand.

I've seen people recommend to use income rather than accumulation as it makes it much easier to separate dividends from capital gains for tax purposes. Is that good advice worth following? Is it difficult to derive this information from accumulation?

Where do dividends usually get paid to? As cash in the investment account? Or direct to a bank acccount?

1. Most investments don't separate out initial capital from subsequent income, and for most investors that is perfectly fine. The investors who do try to keep these things separate tend to have 'ahem' tax reasons for doing so. For most normal people that is not an issue unless the sums in play are very large, or they are expats, or such like.

2. Dividends normally get paid straight to your brokerage 'trading' account. So in my case I am with II and the 'trading' account shows me how many shares of the different companies, and also has a cash tab that is just like a bank account where I can see the dividends as they come in, and I can choose to spend them on buying more shares, or I can transfer the money to my real bank account.

regards, dspp

[JohnB]

I'd keep your non-sheltered investments as INC, not ACC units for 3 reasons.

1) It makes the capital gains calculation much easier when you sell them, though if you think you are under the 11kish annual allowance you needn't do the calculation, unless the disposal is more than 44kish when you always need to. If the rules change, you will be so pleased that all you need to do is subtract sale from cost price.

2) If you are ever asked to do a tax return, again, having those nice neat tax vouchers and confidence that the units themselves aren't sneakly increasing in value is so handy. Even if your dividends are less than the £2k allowance, you still need to fill in details.

3) Those dividends might encourage you to rebalance. At 5% a year, you can move your portfolio sideways, and you might want to move the money into an ISA anyway.

(I had an M&G fund with auto-reinvestment of dividends every quarter. Doing the capital gains calculation to dispose of it over a series of years was horrid)

[AppleCrumble]

1. Most investments don't separate out initial capital from subsequent income, and for most investors that is perfectly fine. The investors who do try to keep these things separate tend to have 'ahem' tax reasons for doing so. For most normal people that is not an issue unless the sums in play are very large, or they are expats, or such like.

Thanks for replying.

For me the sums will be high enough that dividends will likely exceed the £2k allowance. With this in mind I guess I should keep things separate then.

[AppleCrumble]

I'd keep your non-sheltered investments as INC, not ACC units for 3 reasons.

1) It makes the capital gains calculation much easier when you sell them, though if you think you are under the 11kish annual allowance you needn't do the calculation, unless the disposal is more than 44kish when you always need to. If the rules change, you will be so pleased that all you need to do is subtract sale from cost price.

2) If you are ever asked to do a tax return, again, having those nice neat tax vouchers and confidence that the units themselves aren't sneakly increasing in value is so handy. Even if your dividends are less than the £2k allowance, you still need to fill in details.

3) Those dividends might encourage you to rebalance. At 5% a year, you can move your portfolio sideways, and you might want to move the money into an ISA anyway.

(I had an M&G fund with auto-reinvestment of dividends every quarter. Doing the capital gains calculation to dispose of it over a series of years was horrid)

Thanks.

What does move sideways mean?

Yes, I plan to move some into an ISA each year.

[EthicsGradient]

Is it difficult to derive this information from accumulation?

If you are talking about OEICs, then the information should be given to you after the end of the tax year by the investment account provider. There is a further complication of "equalisation", which is the division of the accumulation dividend, for the first period you own the units, into proper income, which has to go on your tax return, and 'equalisation', which is a sort of refund of a bit of your purchase price. I don't feel I can explain this clearly.

If you buy ETFs, there are 'distributing' ETFs, which pay the income they get from their holdings as a dividend like investment trusts and income OIECs, and 'accumulating' ETFs, which hold on to it, like accumulation OEICs. However, you are still meant to pay income tax on this (known as 'excess reported income'), but they make it hard to know how much it is. For instance, Interactive Investor says it's entirely up to each investor to find out the amount. This KPMG website is a good place to look them up: https://www.kpmgreportingfunds.co.uk/Ho ... icInvestor . Like accumulating OIECs, you can then subtract it from the cost of the investment for capital gains calculations.

[fca2019]

Interesting thread. I may be in receipt of a lump sum before long.

Please can anyone help with the following.

If I put in a lump sum into an investment account, I intend to buy some income funds and shares (for the reasons given above).

Do the dividends get paid net of 7.5% tax (if basic rate tax payer), and you can choose either direct to your bank or into the investment account cash balance?

I read from HMRC you have a dividends allowance of £2,000 in 19/20, if you have under/overpaid tax you can claim back on tax return or through your tax code?

Am I right you do not pay any capital gain until you come to sell? Does your account show the current value, book cost and profit?

You can sell up to the CG tax individual exemption limit gains of £12,000, without CGT, example: value £50k - book value £40k = gain £10k, below threshold and can "bed and ISA" that to an ISA without a tax charge.

If your gain is over the £12k in a tax year no charge until you sell? So if you buy and hold, you only have dividends income tax to worry about? Thanks

[SalvorHardin]

Do the dividends get paid net of 7.5% tax (if basic rate tax payer), and you can choose either direct to your bank or into the investment account cash balance?

I read from HMRC you have a dividends allowance of £2,000 in 19/20, if you have under/overpaid tax you can claim back on tax return or through your tax code?

Am I right you do not pay any capital gain until you come to sell? Does your account show the current value, book cost and profit?

You can sell up to the CG tax individual exemption limit gains of £12,000, without CGT, example: value £50k - book value £40k = gain £10k, below threshold and can "bed and ISA" that to an ISA without a tax charge.

If your gain is over the £12k in a tax year no charge until you sell? So if you buy and hold, you only have dividends income tax to worry about?

Dividends are paid without any deduction for dividend tax. Dividends are paid into your account with the broker (the registered address). For investments which are registered into your name, dividend cheques will be posted to your address unless you have sent the manager/registrar a dividend mandate form.

Dividend tax is dealt with in your tax return. Overpayments/underpayments are dealt with via your tax return (they may adjust your tax code or send/demand a cheque). Broker statements (and online accounts) should show current value, cost and profit/loss for each holding. A word of warning: brokers' figures are not always correct, especially if your account has been moved to them from another broker or if dividends are automatically reinvested. When it comes to accurate capital gains tax calculations it's best to keep your own records.

In the UK capital gains are not subject to tax until they have been realised by selling for cash (if an investment is exchanged for another investment, such as shares in a takeover, the capital gain rolls over into the new investment). Taxable Gain = Net Proceeds (i.e. after deducting costs of selling) minus Total Cost (this includes purchase costs, stamp duty and other fees which are charged against larger purchases such as the takeover panel levy of £1 on deals of more than £10,000).

No capital gains tax is due as long as your total realised net gains (i.e. sum of all realised gains minus sum of all realised losses) are less than the annual capital gains tax allowance (£12,000 for 2019/20). You still have to complete a capital gains tax return if the total proceeds received from your sales exceed four times the capital gains tax allowance even if your gains did not exceed the allowance (see link below). Your "Bed and ISA" example is correct.

https://www.gov.uk/capital-gains-tax/wo ... eed-to-pay

A "Buy and hold" strategy means you've only got to worry about dividend tax and higher rate income tax. There is no basic rate income tax liability on dividends from UK companies (there are a few exceptions; a few quoted companies pay gross dividends which are liable to basic rate income tax).

Remember it is your responsibility to notify HMRC of income and gains which are liable to tax. I'm sure that there are quite a few people in Britain who are liable to dividend tax, especially since the allowance was reduced to £2,000 per year, but haven't told the Revenue.

I second the earlier comments about accumulation funds and reinvested dividends. These can create a lot of work when it comes to capital gains tax calculations.

[PinkDalek]

No capital gains tax is due as long as your total realised net gains (i.e. sum of all realised gains minus sum of all realised losses) are less than the annual capital gains tax allowance (£12,000 for 2019/20). You still have to complete a capital gains tax return if the total proceeds received from your sales exceed four times the capital gains tax allowance even if your gains did not exceed the allowance (see link below). ...

https://www.gov.uk/capital-gains-tax/wo ... eed-to-pay

Sorry but (I'm sure unintentionally) the part I've underlined is misleading.

The link you provide includes:

You do not have to pay tax if your total taxable gains are under your Capital Gains Tax allowance.

You still need to report your gains in your tax return if both of the following apply:

the total amount you sold the assets for was more than 4 times your allowance
you’re registered for Self Assessment

There they are talking about the reporting requirements if you already submit (or should submit) Tax Returns via Self Assessment.

If fca2019 is already under Self Assessment and one or both of those reporting limits are exceeded, then the Tax Return notes on page Page TRG 4 are likely to be of assistance (noting the figures quoted there*** are for the Tax Year 2018-19)

https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/787630/SA150_2019.pdf


*** Edit: They commence (my underlining):

Fill in the ‘Capital gains summary’ pages and attach your computations if:

• you sold or disposed of chargeable assets which were worth more than £46,800
• your chargeable gains before taking off any losses were more than £11,700
• you want to claim an allowable capital loss ...

[fca2019]

@SalvorH, @PinkDalek. Thanks guys. I'm not under self assessment, but good to know about the rules you stated, as I may be advising for a non-sheltered account for my Mum which she doesn't have a clue about. And I also may open a non-sheltered account myself within the year, and wish to understand the rules (as they currently stand).