What records do I need to keep for unwrapped investments?

grey_gym_sock

no, that's only for income, not for capital gains.

e.g. you invest £100k. after 1 year, it pays you £2k in dividends, and ends up worth £130k. no capital gains is taxed (because you haven't sold yet), but the £2k is included in your taxable income for the year.

stringer_bell

grey_gym_sock wrote: »

no, that's only for income, not for capital gains.

e.g. you invest £100k. after 1 year, it pays you £2k in dividends, and ends up worth £130k. no capital gains is taxed (because you haven't sold yet), but the £2k is included in your taxable income for the year.

That was my original plan, not to take income but to let it grow. I have maxed out my sipp, pension, have too much saved in cash.. I hear vct's are risky, so this would be the only way to do something with my money

pip895

I don't see any advantage to taking cash from income units in your case. It will complicate your tax return & cost you.


I have funds (accumulation units mainly) outside a wrapper. I sell off & reinvest enough to use up my CGT allowance each year - little income to report - and HL send you a statement anyway.
It will probably be a while before you have to worry about CGT as you only pay once you have profits of over £10600 in stuff you have sold in the year.


Some VCT's - are pretty low risk incidentally (low volatility & long history), and can be easily traded on HL in the second hand market - they are particularly useful once you start hitting the limits re CGT and income as they are tax free - you don't need to buy new issues.

bowlhead99

pip895 wrote: »

I don't see any advantage to taking cash from income units in your case. It will complicate your tax return & cost you.

I have funds (accumulation units mainly) outside a wrapper. I sell off & reinvest enough to use up my CGT allowance each year - little income to report - and HL send you a statement anyway.

I don't know if you are missing something or I am missing something.

I agree with post #2 above from Grey Gym Sock - if you are not using a wrapper, and therefore need to pay tax on income and gains, accumulation units are, if anything, more complicated.

One thing I do agree with pip895 on - is that sure, taking and spending any income generated rather than keeping it invested will detract somewhat from long term performance because there is less money remaining at work in your invesment portfolio over the course of the year. Although, the guy is considering investing up to 2000 pounds a month into an investment portfolio (i.e. perhaps up to 50k every two years) but he is only 'thinking about it' and if keeping records is a hassle he doesn't think he will even bother, so arguably it doesn't seem like he needs the money or is fussed about long term performance...

I don't see how your tax return is complicated by using income units. If anything, it is simplified because you can very clearly see exactly what income you got, and when, and from whom. This goes into your income tax return. For your capital gains tax return, the only 'purchases' of fund units that you might need to include in the 'profit on disposal' calculations are those purchases that you very explicitly and intentionally chose to make over the years (out of new contributions from your bank account, or out of spare dividends sitting around as cash in your trading account).

If you use accumulation units, you can't easily see what income you have made over the year - because it has just been auto-reinvested and turned into a higher valuation of your accumulation unit share price, which you have never received into a separate account even though it represents income which needs to go into your tax return.

And because all this auto-reinvestment is going on at the fund level, it makes it tricky to work out your profit on disposal, because when you buy at 100 and sell at 132 your gain is not simply 32: you have to remember that a penny of the share price growth back in May was auto re-invested accumulating dividends and then a penny of the share price growth in November was the same thing, so really over the whole period you had 100+2 contributions and 132 of sales proceeds = 30 gains (and the 2 divs you never saw, are extracted and reported separately as income).

I mean it is not a fundamentally difficult thing to do, but if you had not bought those auto-dividend-reinvesting accumulation units, and instead just had the basic income-paying ones, you could very easily see that you had bought for 100, sold for 130 ( i.e. 30 capital gains) and received 2 dividends on the side ( i.e. 2 income) during the period, which you might actively choose to invest in that fund or into another fund alongside the new money you are putting in each month or year, or youmight take away and spend.

In other words (IMHO), if the purchases are active intentional decisions, your recordkeeping will generally be easier than if it's being handled for you, even if the 'accumulation unit' route gives you the false sense of security where you mentally think "ah it'll be easy because it's just accumulating up for me". It is merely accumulating into a great big lump of capital and income mashed together in one, that needs to be extricated and bifurcated into its components via careful review of statements and is potentially tricky when you don't simply buy once and sell once but add a bit and sell off a bit periodically.

Of course I do agree that if you generally buy funds that are invested in high-growth-potential companies rather than high-dividend-paying companies, there is not much in the way of dividends and if you need the cashflow you can just sell a bit and get some as needed. Investing in those types of companies - or into funds that invest in those types of companies - can certainly be more tax efficient (with CGT rates being lower than income tax rates). But that is nothing at all to do with the choice of whether to use income units versus accumulation units, so mentioning your funds are 'accumulation units mainly' seems a red herring?

And to be honest, higher growth companies and higher dividend-paying companies will perform dramatically differently during different parts of the economic cycle so unless you are an investing genius and great at timing markets, you can't really just say you will only invest in the growth ones and you never want any dividend ones. It is better to get a good taxable return rather than a negative return.

Finally I would disagree a bit with the comment about VCTs, which though giving you an extra opportunity for a tax free return are not really suitable for everyone due to risk and complexity (obviously less of an issue for a wealthy person who has already used his ISA and pension wrappers).

Basically yes, it's true that some VCT are lower risk than others in terms of volatility. But fundamentally this type of investment company invests in quite risky and illiquid underlying assets. There are some that are aiming deliberately to skew their performance to be lower risk and non-volatile through the strategic choices of investments within the VCT, while hoping to still deliver a decent absolute return to a high rate taxpayer due to the decent one-off income tax relief on the way in, when you invest in a new issue and can hold for the full 5yr+.

But if you are not getting that one-off income tax relief on a new issue because you're only buying and selling on the secondary market, you can take quite a hit against the headline published performance, which is a big deal if the assets are still quite risky. Also there can be quite a spread between the two prices at a point in time when buying and selling as a secondary (i.e. expensive costs to deal) instead of buying at the beginning of the new issue and holding 5-10 years. An active and interested share trader might like it, as there are market inefficiencies to exploit with any illiquid instruments, but it's kinda hard to recommend to someone who doesn't have much of a portfolio of 'mainstream' investments first.

All IMHO, DYOR blah blah.

jimjames

Something I noticed that doesn't seem to have been picked up yet is that you said you had maxed out your cash and S&S ISAs.

If you are investing long term and expecting capital gains and income surely it would be better to not have cash ISAs at all and to have all as S&S ISAs.

That then means you don't need to worry about CGT or income tax on the amounts inside an ISA. But cash outside an ISA won't be an issue for CGT and the income is likely to be less than an income fund so less tax due too.

All depends how much in your cash ISA, if it's just £5k then it wouldnt work but £50k would make a difference. Going forward I certainly wouldn't be putting any more in cash ISAs and just max the S&S Ones.

stringer_bell

bowlhead99 wrote: »

I don't know if you are missing something or I am missing something.

I agree with post #2 above from Grey Gym Sock - if you are not using a wrapper, and therefore need to pay tax on income and gains, accumulation units are, if anything, more complicated.

One thing I do agree with pip895 on - is that sure, taking and spending any income generated rather than keeping it invested will detract somewhat from long term performance because there is less money remaining at work in your invesment portfolio over the course of the year. Although, the guy is considering investing up to 2000 pounds a month into an investment portfolio (i.e. perhaps up to 50k every two years) but he is only 'thinking about it' and if keeping records is a hassle he doesn't think he will even bother, so arguably it doesn't seem like he needs the money or is fussed about long term performance...

I don't see how your tax return is complicated by using income units. If anything, it is simplified because you can very clearly see exactly what income you got, and when, and from whom. This goes into your income tax return. For your capital gains tax return, the only 'purchases' of fund units that you might need to include in the 'profit on disposal' calculations are those purchases that you very explicitly and intentionally chose to make over the years (out of new contributions from your bank account, or out of spare dividends sitting around as cash in your trading account).

If you use accumulation units, you can't easily see what income you have made over the year - because it has just been auto-reinvested and turned into a higher valuation of your accumulation unit share price, which you have never received into a separate account even though it represents income which needs to go into your tax return.

And because all this auto-reinvestment is going on at the fund level, it makes it tricky to work out your profit on disposal, because when you buy at 100 and sell at 132 your gain is not simply 32: you have to remember that a penny of the share price growth back in May was auto re-invested accumulating dividends and then a penny of the share price growth in November was the same thing, so really over the whole period you had 100+2 contributions and 132 of sales proceeds = 30 gains (and the 2 divs you never saw, are extracted and reported separately as income).

I mean it is not a fundamentally difficult thing to do, but if you had not bought those auto-dividend-reinvesting accumulation units, and instead just had the basic income-paying ones, you could very easily see that you had bought for 100, sold for 130 ( i.e. 30 capital gains) and received 2 dividends on the side ( i.e. 2 income) during the period, which you might actively choose to invest in that fund or into another fund alongside the new money you are putting in each month or year, or youmight take away and spend.

In other words (IMHO), if the purchases are active intentional decisions, your recordkeeping will generally be easier than if it's being handled for you, even if the 'accumulation unit' route gives you the false sense of security where you mentally think "ah it'll be easy because it's just accumulating up for me". It is merely accumulating into a great big lump of capital and income mashed together in one, that needs to be extricated and bifurcated into its components via careful review of statements and is potentially tricky when you don't simply buy once and sell once but add a bit and sell off a bit periodically.

Of course I do agree that if you generally buy funds that are invested in high-growth-potential companies rather than high-dividend-paying companies, there is not much in the way of dividends and if you need the cashflow you can just sell a bit and get some as needed. Investing in those types of companies - or into funds that invest in those types of companies - can certainly be more tax efficient (with CGT rates being lower than income tax rates). But that is nothing at all to do with the choice of whether to use income units versus accumulation units, so mentioning your funds are 'accumulation units mainly' seems a red herring?

And to be honest, higher growth companies and higher dividend-paying companies will perform dramatically differently during different parts of the economic cycle so unless you are an investing genius and great at timing markets, you can't really just say you will only invest in the growth ones and you never want any dividend ones. It is better to get a good taxable return rather than a negative return.

Finally I would disagree a bit with the comment about VCTs, which though giving you an extra opportunity for a tax free return are not really suitable for everyone due to risk and complexity (obviously less of an issue for a wealthy person who has already used his ISA and pension wrappers).

Basically yes, it's true that some VCT are lower risk than others in terms of volatility. But fundamentally this type of investment company invests in quite risky and illiquid underlying assets. There are some that are aiming deliberately to skew their performance to be lower risk and non-volatile through the strategic choices of investments within the VCT, while hoping to still deliver a decent absolute return to a high rate taxpayer due to the decent one-off income tax relief on the way in, when you invest in a new issue and can hold for the full 5yr+.

But if you are not getting that one-off income tax relief on a new issue because you're only buying and selling on the secondary market, you can take quite a hit against the headline published performance, which is a big deal if the assets are still quite risky. Also there can be quite a spread between the two prices at a point in time when buying and selling as a secondary (i.e. expensive costs to deal) instead of buying at the beginning of the new issue and holding 5-10 years. An active and interested share trader might like it, as there are market inefficiencies to exploit with any illiquid instruments, but it's kinda hard to recommend to someone who doesn't have much of a portfolio of 'mainstream' investments first.

All IMHO, DYOR blah blah.

Thank you for this post, it is very helpful

stringer_bell

jimjames wrote: »

Something I noticed that doesn't seem to have been picked up yet is that you said you had maxed out your cash and S&S ISAs.

If you are investing long term and expecting capital gains and income surely it would be better to not have cash ISAs at all and to have all as S&S ISAs.

That then means you don't need to worry about CGT or income tax on the amounts inside an ISA. But cash outside an ISA won't be an issue for CGT and the income is likely to be less than an income fund so less tax due too.

All depends how much in your cash ISA, if it's just £5k then it wouldnt work but £50k would make a difference. Going forward I certainly wouldn't be putting any more in cash ISAs and just max the S&S Ones.

Yeah, I have been thinking of transferring my cash ISA into a S&S ISA. I kept a cash ISA as I was hoping for interest rate hike, but that doesn't seem to be coming. I have £17k in my cash ISA

Glen_Clark

stringer_bell wrote: »

Do I have to keep records on my investments on unwrapped isa's?

Whats an 'unwrapped isa' ?

stringer_bell

Glen_Clark wrote: »

Whats an 'unwrapped isa' ?

thats an error due to me typing too fast. I meant investments outside of an ISA ( unwrapped )

jimjames

Also worth considering that if you need to have a mix of investments inside and outside ISA then ones that generate income may be better inside and ones for capital growth better outside so you can use your annual CGT limits up