Chargeable Event

cheerfulcat

Chrismaths wrote:

[political rant]The best solution to the idiotic inconsistencies in the tax system is a flat tax, payable on ALL income - no exceptions, at the same rate by companies/individuals/partnerships/trusts - so long as the money is taxed once and at the same rate. There are currently at least 7 rates of income and corportation tax - 0, 10, 19, 20, 22, 32.5, 40 - plus all the tax trap rates with tapered tax credits/benefits awards etc. It's just plain daft.[/political rant]

Seemingly daft, but actually quite lucrative? Sort of like confusion pricing on mobile phone tariffs...

Chrismaths

If you receive a dividend from a UK company, the company has paid 30% tax on the profit already, unless it's a really small company, in which case it has paid between 19-30% tax. But most listed companies that small don't pay dividends!

EdInvestor

Chrismaths wrote:

This dividend, magically, now has only a 10% tax credit attached to it, which settles the basic rate tax liability of 10%

Yes.As I keep saying. :wall: :wall:


All companies pay corporation tax, regardless of whether or not they also pay dividends, it's not relevant.

Here's an explanation of this dividend tax credit matter for those who are really interested in the technicalities.

For most of us who can do without this stuff, the main points to remember are there is no tax for basic rate taxpayers on divis, and 25% for those on higher rate.

ReportInvestor

Chrismaths wrote:

The 30% [dividend tax] I refer to is of course corporation tax

Is that deducted from companies' profits, whether they pay dividends or not?

Your statement "Dividends have 30% tax deducted at source" is highly misleading to MSE readers & investors, is it not?

oldfella

Is that deducted from companies' profits, whether they pay dividends or not?

---

profits are taxed not dividends - thus whatever divs the company distributes arrive with tax already deducted, so no further tax is due unless you are a higher rate tax payer

Mike

EdInvestor

dunstonh wrote:

In any investment of any type, including savings accounts. If you draw more than it makes your value will go down. I cannot understand why Ed feels that this situation is unique to investment bond?

Let me give you an illustration of why I think bonds are often misleading because of the tax arrangements and capital withdrawals.

Take a typical 50k bond. The investor plans to take a 5% annual withdrawal,ie 2,500.

The bond is expected to grow at 7.5% but has charges of 1.75%, bringing its net return down to 2,875 pa. Assume for simplicity that the returns consist 50/50 of capital gains (taxed at 22%) and dividends( taxed at 20%) so that the tax on the return of 2,875 is 604 pounds, reducing the gain to 2,271.

In order to pay the investor the income, the capital has to be depleted by 229 pounds, right from the start.

Are the investors all aware that by taking a 5% "tax free income" they will be automatically depleting their capital where this is the case?

Is is not immediately apparent that this is going to happen because of the way the tax impositions are notified - as 'chargeable events.' Is it a requirement to explain this risk to the investor?

dunstonh

In that example, what is the difference between investment bond, iSA or unit trust? If you take a fixed regular withdrawal from those, then the same principle applies. If you draw more than it makes, the value goes down.

Are the investors all aware that by taking a 5% "tax free income" they will be automatically depleting their capital where this is the case?

Again you are sound biting the issue. Picking a one liner and making is sound like a negative point. Taking 5% withdrawal of capital can save tax for a number of people. That doesnt just apply to investment bonds but a number of other investments too.

With exactly the same investments available with Unit Trusts/OEICs, ISAs, Pensions and bonds, the investment return/potential is a non issue as it applies the same with all of them. If you invest in Invesco Perpetual Income in pensions, unit trusts, ISAs or investment bonds then the return will be the same with the exception of taxes and charges.

If the charges and taxes are better for you with a bond, you should go with a bond. If they are better for you with a unit trust, you should go with a unit trust. Some people will find bonds the better option, others will find unit trusts.

Isnt it about time you realised that not everyone is the same and that different products are there to suit different people?

Is is not immediately apparent that this is going to happen because of the way the tax impositions are notified - as 'chargeable events.' Is it a requirement to explain this risk to the investor?

A non taxpayer, lower or basic rate taxpayer wouldnt have an issue with a chargeable event 9/10. In the few cases where it could apply, you would expect it to be mentioned. Just because a chargeable event has occured, it doenst mean a charge will apply.

Lets we work your example

Take a typical 50k bond. The investor plans to take a 5% annual withdrawal,ie 2,500.

The bond is expected to grow at 7.5% but has charges of 1.75%, bringing its net return down to 2,875 pa. Assume for simplicity that the returns consist 50/50 of capital gains (taxed at 22%) and dividends( taxed at 20%) so that the tax on the return of 2,875 is 604 pounds, reducing the gain to 2,271.

Take a REAL example of a50k bond. The investor plans to take a 5% annual withdrawal,ie 2,500.

The bond is expected to grow at 7.5% after charges of 1.2%, giving it a net return of 3,750 pa. Taxation has already occured within the investment at no more than 20% but closer to 15% in reality. This leaves no further liaiblity to the individual. THe individual is withdrawing £2500 a year leaving the value to increase by £1,250.

The regular withdrawal doesnt go on the tax return, doesnt impact on age allowance and the value of the bond isnt taken into account in a means test for benefits like pension credit or local authority care.

If the circumstances fit, it is a good tax wrapper. If they dont, then there can be better.

EdInvestor

The bond is expected to grow at 7.5% after charges of 1.2%, giving it a net return of 3,750 pa. Taxation has already occured within the investment at no more than 20% but closer to 15% in reality.

So you are saying that the charges figure includes the taxation, are you?

cheerfulcat

dunstonh wrote:

In that example, what is the difference between investment bond, iSA or unit trust? If you take a fixed regular withdrawal from those, then the same principle applies. If you draw more than it makes, the value goes down.

There is the difference that normally when taking an income from an ISA or UT or, indeed, from directly held shares, one would expect to take the natural income, i.e. the dividend. With investment bonds the income is created by cashing in units. This is the real problem; to create the same income when the unit price is down means cashing more units, which depletes capital. It can create a vicious circle.

Having said that, I can see where someone with a large amount of capital, no income and close to pension age could benefit from one of these bonds.

dunstonh

There is the difference that normally when taking an income from an ISA or UT or, indeed, from directly held shares, one would expect to take the natural income, i.e. the dividend. With investment bonds the income is created by cashing in units.

This is the point I am making though.

With bonds you can take a natural income if you wish. Or you can take a fixed regular withdrawal. Exactly the same as ISAs and Unit Trusts.

Whilst not every provider allows a natural income withdrawal on a bond, not every provider allows a fixed regular withdrawal on an ISA either.

This is the real problem; to create the same income when the unit price is down means cashing more units, which depletes capital. It can create a vicious circle.

It doesnt deplete capital though because it is offset by the investment return. If you assume accumulation units, the income from the underlying investments are reflected in the unit price which increases over time. So whilst a regular capital withdrawal will reduce the number of units held over time, the unit price goes up with the investment return.

As long as you draw no more than it makes, you will not reduce your capital value. If you invested last year you would have made around 15% on the value. Draw 7.5% out and you still have a 7.5% gain on the value. Very similar to the person that draws a monthly amount out of their savings account but gets an annual interest payment put back in again. They are drawing their capital each month but the interest goes back in again to make up for it. The bonds are the same except the return is reflected in the unit price.

So you are saying that the charges figure includes the taxation, are you?

I dont follow what you are saying. In your examples with dividends you ignore the tax taken so I did in mine as well. With unit linked funds, the consumer sees the returns after tax anyway. Your example with shares is treated after tax so I was doing the same. You also used 7.5% before tax and charges whereas you tend to find that its closer to 10% average after tax and charges.