Tax question

talexuser

I'm maxed out on S&S ISAs and want to buy some Investment Trusts outside ISAs.

If I buy accumulation units, and after say 5 or 10 years sell units, do they count as income and have to be added to gross income for income tax or are they capital gains?

If capital gains then presumably you could sell £10600 each year (if lucky enough to have had a 10.6k gain on those funds)?

Lokolo

Pretty sure ACC gains are used against capital gains allowance.

jimjames

You can't buy ACC units of an investment trust. An IT is actually a traded share on the stock market in its own right not a fund. It may produce an income which can be reinvested in additional shares and via a share plan this may be the most cost efficient way of doing it.

For example with some IT share plans you only pay stamp duty on the reinvestment which is only 0.5% and with no lower limit.

Funds do have INC or ACC units but those are unit trusts that are not traded on a stock market.

As such the income will be taxed each year if you are over the basic rate tax allowance and any reinvestment will be taxed as Capital gains once invested so you can then use your CGT allowance but this would also cover the initial investment as well.

talexuser

Thank you, have I got this right?

The most cost effective route for Investment Trusts is generally to use the Trusts own purchase scheme and opt for reinvestment of dividends (paying the stamp duty).

But I would have to keep records of the dividends reinvested for each tax year, which would count as gross income towards income tax?

And I could sell up to £10600 worth each year without incurring Capital Gains tax and that is not counted as gross income for income tax purposes?

jimjames

talexuser wrote: »

Thank you, have I got this right?

The most cost effective route for Investment Trusts is generally to use the Trusts own purchase scheme and opt for reinvestment of dividends (paying the stamp duty).

But I would have to keep records of the dividends reinvested for each tax year, which would count as gross income towards income tax?

And I could sell up to £10600 worth each year without incurring Capital Gains tax and that is not counted as gross income for income tax purposes?

It depends on the trust but yes many run their own savings schemes that are often the cheapest way to buy & hold outside an ISA.

If you are a basic rate taxpayer then there is no additional income tax to pay. If you are a higher rate taxpayer then you should declare any dividends on your tax return. You would need to keep a record of the purchase costs of any shares for later CGT disposal calculations.

You can make up to your CGT limit each year whether these gains come from shares bought directly or from dividend reinvestment doesn't matter.

pqrdef

talexuser wrote: »

And I could sell up to £10600 worth each year without incurring Capital Gains tax

The allowance is on the gain, not the price, you can realise gains of £10,600 a year.

talexuser

pqrdef wrote: »

The allowance is on the gain, not the price, you can realise gains of £10,600 a year.

That's what I understood but I did not quite understand jimjames's last paragraph as including the initial investment:

jimjames wrote:

As such the income will be taxed each year if you are over the basic rate tax allowance and any reinvestment will be taxed as Capital gains once invested so you can then use your CGT allowance but this would also cover the initial investment as well.

jimjames

talexuser wrote: »

That's what I understood but I did not quite understand jimjames's last paragraph as including the initial investment:

Apologies if that wasn't clear.

What I mean is that any gain is not calculated just on the gain from the reinvested dividends but you also need to be aware of any gains from the original share purchase(s) so you may have quite a few events to record if you are investing monthly for example. This would be a mix of purchases of shares by you and also purchases from reinvested dividends.

Thrugelmir

jimjames wrote: »

You can't buy ACC units of an investment trust. An IT is actually a traded share on the stock market in its own right not a fund. It may produce an income which can be reinvested in additional shares and via a share plan this may be the most cost efficient way of doing it.

Some trusts have income shares, growth shares and a combination of the 2 (units).

Off the top of my head both of these F&C stable trusts have this structure. Investors Capital Trust and FC Managed Portfolio Trust.

If capital gains then presumably you could sell £10600 each year (if lucky enough to have had a 10.6k gain on those funds)?

Correct, many people pay unnecessary fees by putting what are in essence unsuitable investments in their ISA.

talexuser

jimjames wrote: »

Apologies if that wasn't clear.

Not at all. thanks for all the input. Obviously it's all a little more complicated than just trying to get better than 1.4% (after tax) in a savings account!

TCA

Thrugelmir wrote: »

Correct, many people pay unnecessary fees by putting what are in essence unsuitable investments in their ISA.

So for a basic rate tax payer who doesn't need his full capital gains tax allowance each year, there's no advantage of a S&S ISA over a normal trading/investment account?