Mechanics of new £5000 dividend allowance.

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Say you have no unwrapped investments so far but want to take advantage of the new dividend allowance next April, but do not need the dividends as income and want to reinvest them.

Obviously an income fund (say investment trust) would greatly simplify the calculation of tax year dividends. But if you reinvest the dividends every six months how would you keep track of capital gains? I assume once a dividend is reinvested it becomes liable for capital gains? Or would investing the dividends into a second trust keep capital gains calcs simpler, assuming you found two trusts you were happy with?
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  • Lakeuk
    Lakeuk Posts: 1,084 Forumite
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    I assume once a dividend is reinvested it becomes liable for capital gains

    For ordinary shares you're only liable for capital gains when you sell the share and go above your allowance for the year. Reinvesting dividend is the same as paying with your own cash.

    If you don't have a S&S ISA and likely to max out the £5000 allowance then open ISA for this year and again come April to be able reduce taxes although I'd expect would make much of a dent
  • talexuser
    talexuser Posts: 3,500 Forumite
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    Thanks, assume current accounts/s&s isas/pensions are all maxed out, and vcts/eits are too risky so out of the equation, so the dividend allowance is an extra to be taken advantage of.

    So it seems if you don't need the income now the only thing to do is make sure dividends are less than £5000, reinvest them, and eventually cash in up to your ctg allowance every year as a supplement to income?

    Now if you buy an unwrapped acc fund, does the company give you a tax certificate giving the equivalent yearly dividend income similar to a savings interest certificate, otherwise how can you work it out?
  • C_Mababejive
    C_Mababejive Posts: 11,658 Forumite
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    If you hold shares in a nominee account and set the divis for auto reinvestment ,does that divi count toward the 5k allowance?
    Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..
  • Lakeuk
    Lakeuk Posts: 1,084 Forumite
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    If you hold shares in a nominee account and set the divis for auto reinvestment ,does that divi count toward the 5k allowance?

    Yes it will count to your 5k allowance, you are taking cash and buying shares, only difference is your provider does those steps on your behalf automatically
  • Lakeuk
    Lakeuk Posts: 1,084 Forumite
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    talexuser wrote: »
    So it seems if you don't need the income now the only thing to do is make sure dividends are less than £5000, reinvest them, and eventually cash in up to your ctg allowance every year as a supplement to income?

    Why do you need to make sure you don't make more than £5k, just go with the flow if you go over £5k you just pay the tax owed at the end of the tax year, if you get £5100 you only owe tax on the £100.

    Plus you need a large portfolio of shares to get to £5k dividend, assuming you average a 3% dividend rate, you'd need to own shares valued at just short of £167,000, most I guess won't be anywhere near this
  • noh
    noh Posts: 5,802 Forumite
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    Also if you have a spouse each of you are entitled to the £5000 dividend allowance therefore it is advantageous to split the holdings between you if you are likely to exceed the individual allowance.
  • C_Mababejive
    C_Mababejive Posts: 11,658 Forumite
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    What is the tax rate to be paid for the excess over 5k anyway?
    Feudal Britain needs land reform. 70% of the land is "owned" by 1 % of the population and at least 50% is unregistered (inherited by landed gentry). Thats why your slave box costs so much..
  • noh
    noh Posts: 5,802 Forumite
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    What is the tax rate to be paid for the excess over 5k anyway?

    7.5% on dividend income within the basic rate band
    32.5% on dividend income within the higher rate band
    38.1% on dividend income within the additional rate band

    https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet
  • bowlhead99
    bowlhead99 Posts: 12,295 Forumite
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    talexuser wrote: »
    Now if you buy an unwrapped acc fund, does the company give you a tax certificate giving the equivalent yearly dividend income similar to a savings interest certificate
    Yes.

    At the time of every distribution you should get a tax voucher showing what dividends you earned on your units, what (if anything) equalization you got on your units if you joined the fund part way through the period, etc. Even if you don't physically take the distribution in cash, the information is made available.

    However, some platforms can be a bit slack in passing the information along. Generally there is a 'consolidated tax certificate' put together by your platform at the end of the year covering all your holdings. If not, the fund manager will publish the dividend amount per unit and the record dates so you can work it out. But providing you with information on your holdings from the underlying funds is part of the service the platform manager is getting paid for when you pay him a quarterly or annual fee for platform access.
    I assume once a dividend is reinvested it becomes liable for capital gains? Or would investing the dividends into a second trust keep capital gains calcs simpler, assuming you found two trusts you were happy with?
    When you make an investment: whether the source of the cash to make that investment is manual reinvestment of dividends received from that fund or from another fund, or automatic internal reinvestment within an acc fund, or a plain old contribution of your own new cash - it becomes a 'cost of investment' for you to compare against later proceeds of investment to calculate the capital gain or loss.

    As someone selling a share in a company or investment trust or a unit in a fund, you are expected to know how much you paid for the share or unit and calculate the gain or loss accordingly.This may result in tax to pay, or a claim of losses to be filed to offset against future gains, or nothing. So you should keep records of what you spend on buying shares or units, whatever practical mechanics you use to actually do your investing or reinvesting.

    I suppose you are right that if you take dividends out of one fund or trust, if you always reinvest that into a different fund or trust then it will keep it clean. However, it will still involve recordkeeping. So there is nothing inherently wrong with simply recording the amounts you reinvested back into the same fund. The alternative of investing your dividend proceeds into a different fund entirely that you don't really want because you prefer the first fund - but want to keep your tax comps clean - seems a bit silly. Don't "let the tail wag the dog".

    Personally I am happy to have dividend-paying funds and shares in my pension because the free flowing cash helps me naturally 'top up' each of the funds, and rebalance the funds to get my asset allocation more in line with my preferred ratios each month or each quarter as I invest my new ongoing contributions.

    If you let all the dividends naturally 'roll up' via Acc versions of funds you will at some point end up with too much in Fund 1 relative to Fund 2 or vice versa depending on relative performance - and need to manually sell out and buy back in to move your overall assets to your desired ratios. However, if you are doing all your investing via a single fund, that's not relevant. With some platforms it can get expensive reinvesting distributed dividends so it can be easier to just buy the Acc one and accept that the internal reinvestment will just be a bit trickier to follow because you don't have a cash trail of it happening.
  • grey_gym_sock
    grey_gym_sock Posts: 4,508 Forumite
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    Lakeuk wrote: »
    Why do you need to make sure you don't make more than £5k, just go with the flow if you go over £5k you just pay the tax owed at the end of the tax year, if you get £5100 you only owe tax on the £100.

    exactly. if you pay a little tax on dividends, that should just make you feel richer. a bit like paying higher-rate tax on the top £100 of your income.
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