MSE News: Budget 2016: Cash ISA allowance up to £20,000 in 2017

masonic

bowlhead99 wrote: »

In that case, then outside an ISA they will surely be taxed at source at 20% whether or not you have the income version that physically pays the money to your platform or the accumulation version that simply reinvests your share of the proceeds internally to create more valuable units. In this case you do not need to go to HMRC to pay the tax unless you are a high rate taxpayer who needs to pay more than 20%.

That is indeed what happens currently, at least with most bond funds, but it is unlikely this behaviour will continue after 5th April, seeing as no other interest payments will be taxed at source (for example those from deposit accounts or P2P investments).

bowlhead99

There was a post on one of the other hundreds of recent ISA/ LISA / savings allowance threads earlier today or yesterday where someone (grey gym sock iirc) posted a quote confirming that the implementation date for authorised investment funds to switch to gross payments was effective April 2017. I haven't checked it to core legislation as I have no reason to doubt it and don't have any bond funds held unwrapped - but assumed it was .gov.uk info as opposed to press speculation. Doesn't seem unreasonable.

schiff

I'm getting a bit lost here! This is the fund in question:

The Fundsmith Equity Fund and I have the T Class Accumulation Shares (Dividends Retained).

https://www.fundsmith.co.uk/fund-factsheet

bowlhead99

Right, so:

i) The fund is an Open Ended Investment Company owned by you and a bunch of other shareholders. The fund is not a bond and does not invest in bonds. It invests in equities (shares) of companies which are listed primarily in the UK, US and Europe. It receives dividends from the companies in which it invests.

ii) None of the dividends received are physically paid out to you, but they are formally allocated to you and the other Accumulation shareholders for tax purposes every six months.

iii) The dividends received from investments are retained within the fund to be reinvested in new or existing investee companies. As a consequence the fund shares that you hold are more valuable than if they had paid the dividends out to the shareholders of the fund and you had your share of the dividend money in your hand instead.

iv) As all the money is reinvested internally, you never receive dividends and never need to spend it on buying new shares of the fund. Consequently the number of shares in the fund that you own will never increase unless you go and get more money from your own bank account and subscribe for more shares.

v) When the dividend income is allocated to you by the fund, no tax is deducted at source.

vi) This tax year (2015/16): if you are a high rate taxpayer you will need to pay some tax to HMRC on what was received and allocated to you. If you are a basic rate or nil rate taxpayer you will not owe anything on what was received and allocated to you.

vii) Next tax year (2016/17): Whether you are a nil rate, basic rate or high rate taxpayer you have an annual allowance for dividend income of £5000. So the first £5000 a year that is allocated to you is effectively tax free even if your other income makes you a taxpayer. Anything after £5000 is taxed at variable rates depending on your tax band.

viii) if you sell a share in the fund you will make a taxable capital gain or loss, equivalent to the net sales proceeds from selling it less [cost of buying the share plus accumulated dividends allocated to that share during the period you owned it]. If the total gains from shares sold in any one tax year year exceed your annual exempt amount for capital gains, you will owe capital gains tax charged at a rate dependent on your tax band.

ix) If you held the fund in an ISA instead of 'unwrapped' there would be no taxes on dividends allocated to you or on gains made by you, regardless of amounts, and there would be no requirement to keep any records of how much you paid for the shares, what dividends were allocated to you, or how much you sold the shares for, because they would never appear on any tax return.

x) on a pirate's treasure map indicates where they buried the loot.

schiff

That is about as comprehensive as it gets, thank you. I'm moving the investment into an ISA when the new allowance starts in April.

NB: you won't believe this but it's possible for a peg leg to itch. Mine does anyway, particularly when there's salt in the air.