The Lemon Fool

Sorry if this is in the wrong place.


Can anyone explain to me the tax implications of withdrawing money from a general investment account.

I'm pretty happy that I have the CGT side of things figured out.

CGT to pay on any gain when selling. CGT annual allowance of £12,300 that can't be carried over.

The £2000 dividend allowance is also pretty much self explanatory.


My problem comes from my understanding of income tax relating to withdraws from a GIA.

Reading online just confused me more and more. It suggests income tax based on your tax band but that 'seems' bonkers.

Unlike an ISA or pension, there are no tax benefits in a GIA. You pay income tax on any income you receive from the GIA


I work best with examples so here is my understanding.

I work and am a basic rate tax payer. I use up all my annual tax free allowance of £12,570 through my salary.

I have a GIA and invested £100,000 in there.

I want to withdraw £10,000 and sell £10,000 worth of investments.

For simplicity let's say there was no CGT to pay as there was no gain on my investment.

If I wanted to withdraw £10,000 would I pay income tax on this?



Yes is the way I'm reading things but that seems bonkers.
Basically any investment you sell would have needed to have grown by 20% (tax bracket) just to break even when withdrawing it, 30% on anything over your CGT allowance (20% income tax, 10% CGT)

I'm seriously hoping it is all in the wording and Income is the important word on the numerous online descriptions. If selling the underlying asset (shares) then hopefully that doesn't trigger income tax (but possibly CGT which I'm clear on)


I understand this is probably a really stupid question but I can't get my head around it.

There'd be no income tax, it's just like withdrawing cash from a bank account. You don't need to tell anyone about it.

Scott.

swill453 wrote:There'd be no income tax, it's just like withdrawing cash from a bank account. You don't need to tell anyone about it.

Scott.

So everywhere that says

You pay income tax on any income you receive from the GIA

Is referring to? Presumably if you are invested in income generating funds/shares it's the income they produce. But wouldn't that be classed as dividends and be taxed as such rather than 'income'. ?


Still just as confused.....

Will2pass wrote:

swill453 wrote:There'd be no income tax, it's just like withdrawing cash from a bank account. You don't need to tell anyone about it.

So everywhere that says

You pay income tax on any income you receive from the GIA

Is referring to? Presumably if you are invested in income generating funds/shares it's the income they produce. But wouldn't that be classed as dividends and be taxed as such rather than 'income'. ?

Yes, because the tax you pay on the income (dividends) is income tax.

Scott.

swill453 wrote:

Will2pass wrote:

swill453 wrote:There'd be no income tax, it's just like withdrawing cash from a bank account. You don't need to tell anyone about it.

So everywhere that says

You pay income tax on any income you receive from the GIA

Is referring to? Presumably if you are invested in income generating funds/shares it's the income they produce. But wouldn't that be classed as dividends and be taxed as such rather than 'income'. ?

Yes, because the tax you pay on the income (dividends) is income tax.

Scott.

Right. So CGT on the growth (if above CGT allowance) but income tax on any dividends.

My plan would be to invest in accumulation funds and sell off amounts and access the cash (basically drawdown before my SIPP kicks in).

So I really only need to worry about the CGT side of things.

Thanks for your help.

Will2pass wrote:Right. So CGT on the growth (if above CGT allowance) but income tax on any dividends.

My plan would be to invest in accumulation funds and sell off amounts and access the cash (basically drawdown before my SIPP kicks in).

So I really only need to worry about the CGT side of things.

Thanks for your help.

Wait, don't fall into the trap of thinking that accumulation funds don't pay dividends. They do, and they're taxable. It's just much harder to track them and work out how much you need to pay.

I don't hold accumulation shares in taxable accounts for this reason.

Scott.

Will2pass wrote:Presumably if you are invested in income generating funds/shares it's the income they produce. But wouldn't that be classed as dividends and be taxed as such rather than 'income'. ?

Some are, some aren't. It depends on the nature of the investment. For example if you hold a fund of Corporate Bonds, that's taxed as income. You should get a certificate from the Broker giving the tax treatment of each amount of dividend or interest credited. Dividends from REITs (property funds) may be classified as PID (Property Income Distribution) and are paid with tax already deducted.

Also be aware that if you invest in "accumulation" OEICs or ETFs you won't see any credited income, but there's still a potential tax liability. If you keep records of how much it was, it can be offset against any CGT gain on future sale. In my view accumulation units are a record keeping nuisance when held outside ISAs or SIPPs.

It would be more accurate to say that any income ARISING from investments is liable to tax, whether in a GIA or not (eg on certificated shares) or accumulated in unit trusts that do not distribute. the GIA has no tax effect one way or the other. Whether you pay tax on it depends on your aggregate dividends and interest and other income, and your tax allowances.

Sorry peeps. More lost now than before I asked the question.

Back to examples (the only way I understand)

£500,000 invested all at once (for simplicity everything is in one fund all priced the same)

The return this year is 4% (£20,000)

I wish to withdraw £20,000

The tax liability will be?

£12,300 CGT allowance so 10% CGT ON £7,700 = £770.

After CGT is paid it leaves £19,230


Now where does the income tax come in (based on no annual allowance left and I'm a basic rate tax payer)?

Alaric wrote:

Will2pass wrote:Presumably if you are invested in income generating funds/shares it's the income they produce. But wouldn't that be classed as dividends and be taxed as such rather than 'income'. ?

Some are, some aren't. It depends on the nature of the investment. For example if you hold a fund of Corporate Bonds, that's taxed as income.

Well, specifically it'll be taxed as interest.

It is, of course, a form of income, as are dividends, PIDs, pensions, earnings, etc. They're all income and subject to income tax, but it's just that the income tax on dividends is different to the income tax on interest, etc, etc.

Alaric wrote:You should get a certificate from the Broker giving the tax treatment of each amount of dividend or interest credited. Dividends from REITs (property funds) may be classified as PID (Property Income Distribution) and are paid with tax already deducted.

Also be aware that if you invest in "accumulation" OEICs or ETFs you won't see any credited income, but there's still a potential tax liability. If you keep records of how much it was, it can be offset against any CGT gain on future sale. In my view accumulation units are a record keeping nuisance when held outside ISAs or SIPPs.

To be clear to readers, with "accumulation" OEICs or ETFs while you won't receive any credited income in hand, you will see it in the consolidated tax certificate issued by your broker each year ... and, yes, accumulation units are a pain outside of an ISA or SIPP.

It entirely depends what it is invested in. Shares, Unit Trusts, ETFs etc or in some sort of insurance company bond. If the latter their documentation should explain the tax treatment. If shares, unit trusts, or ETFs, tax will depend on what dividends they pay out (or accumulate). CGT is payable on gains not disposal proceeds, so it depends how the amount you sell compares to the cost of what you have sold.

There is no tax as such on a 'general investment account'. There is tax on dividends and gains on investments held in anything other than an ISA or SIPP etc.

I think the withdrawal and income tax are 2 different things which is perhaps where the confusion is coming from:

Selling the units and taking the money out would (potentially) generate a CGT event.

The income tax would be due on any dividends and/or interest paid in the tax year as a poster above explained. Accumulation units would make no difference as the taxman still sees the dividend as being paid to you even though it was reinvested (which is why Acc units can be an admin nightmare outside of an ISA or pension). Selling units and withdrawing cash wouldn't automatically generate an income tax event - it would occur when the dividend/interest was paid.

vagrantbrain wrote:Selling the units and taking the money out would (potentially) generate a CGT event.

To be even more specific, it's the selling of the units that is the potential CGT event. Even if you left the money in the GIA the CGT would still be due.

(Though I have to say the OP is unlikely to be due any CGT in the example transaction.)

Scott.

Will2pass wrote:Sorry peeps. More lost now than before I asked the question.

Back to examples (the only way I understand)

£500,000 invested all at once (for simplicity everything is in one fund all priced the same)

The return this year is 4% (£20,000)

I wish to withdraw £20,000

The tax liability will be?

£12,300 CGT allowance so 10% CGT ON £7,700 = £770.

After CGT is paid it leaves £19,230


Now where does the income tax come in (based on no annual allowance left and I'm a basic rate tax payer)?

No to all of the above!

There is NO TAX on withdrawing the £20,000.

There is ONLY (potential) tax on realised gains or income (dividends/interest) -- and it's the actual gains or income you got that count, irrespective of whether you withdraw them or not.

You like examples: here's a few following on from your £500,000 invested all at once.

a) a year later it's still worth £500,000 and there have been no dividends. You sell £100K of it, withdraw £20K and reinvest the remaining £80K into another fund. No tax.

b) a year later it's worth £600,000 and there have been no dividends. You sell £100K of it, withdraw £20K and reinvest the remaining £80K into another fund. Tax is CGT on £100K. £12,300 allowance so there's 10%/20% tax split in some ratio on the remaining £87.7K, depending on how far along your other income puts you in the BRT/HRT scale.

c) a year later it's still worth £500,000 but there's been £30K of dividends. You withdraw £20K and reinvest the remaining £10K into another fund. Tax is dividend income tax on £30K. The first £2K is taxed at 0% and the remaining £28K is taxed at some split of 0%/7.5%/32.5% on how far along your other income puts you in the non/BRT/HRT scale.

Very helpful.

Thanks everyone for bearing with me.

mc2fool wrote:b) a year later it's worth £600,000 and there have been no dividends. You sell £100K of it, withdraw £20K and reinvest the remaining £80K into another fund. Tax is CGT on £100K. ...

Sorry, that was nonsense! Dunno what I was thinking.

If it started at £500K then when it is £600K the gain is 20%, so if you sell £100K of it then that £100K worth of it would have originally cost you £83,333 and the gain would be £16,667, which is how much is (potentially) liable to CGT.

Thanks.


The CGT part of things is crystal. It's the way Income Tax is described in writeups on tinternet that had me confused.

If you are considering how well.investments are doing 'total return' which is capital gain + dividends is the key measure. For tax porpoises its best to keep the 2 things seperate, and not talk about the more vague 'return' which could be either or both.

GIA gains are taxable either as capital gains or as income, not both. Very subjectively. Mostly share price appreciation will be taxed as capital gains whilst dividends and/or interest are taxed as income. But in some cases such as foreign ETF's/funds that aren't UK reporting registered share price appreciation is also taxed as income.

Against that you have allowances such as CGT allowance and income tax allowance and a dividend allowance.

In the case of accumulation funds you need to locate/record how much of the funds total return was down to dividend investment and declare that amount to the taxman each year as though you'd actually been paid the dividend, and also uplift the price paid for the shares by the amount of dividends so that when you do come to sell the shares you don't also end up paying CGT tax on that element of the share price appreciation.

If you withdrew £10,000 in a year where £2000 of that was paid as dividends during the year (so perhaps sitting as cash in your account), and £8000 was sourced from selling share that had perhaps seen the share price appreciation from a £4000 cost of shares to £8000 value of shares sold = £4000 capital gain, then as that's under your yearly CGT allowance ... combined there'd be not taxes falling due. Come to that even if you sold £100,000 value of shares that you'd paid £90,000 for those shares there'd still be not CGT falling due. Assuming of course you hadn't already used up some/all of that year CGT allowance amount.

There was a key point which was touched on in a prior post but which I think needs to be made crystal clear.

As far as the tax man is concerned, the GIA (nasty Americanism!) doesn’t exist. Whether money is withdrawn from it or not is irrelevant. If dividends are earned on stocks inside the account, they are taxed as dividends whether or not the funds are withdrawn. If a capital gain is incurred by selling shares in the account, the gain is taxed as such whether or not the funds are withdrawn.