Holding mutual funds outside the ISA

the_learner

Hi, I am holding 2 funds outside the ISA:

1) US index tracker by Fidelity
2) Standard Life Global Absolute Strategies

So the first is a pure equity fund, tracking the S&P500 while the second falls under the category of absolute return funds.

What are the tax implications of holding these outside the ISA? Am I liable of income tax or just capital gain tax for these 2 funds?

NordicNoir

the_learner wrote: »

Hi, I am holding 2 funds outside the ISA:

1) US index tracker by Fidelity
2) Standard Life Global Absolute Strategies

So the first is a pure equity fund, tracking the S&P500 while the second falls under the category of absolute return funds.

What are the tax implications of holding these outside the ISA? Am I liable of income tax or just capital gain tax for these 2 funds?

Any income received from these funds is taxable. If you are lucky, you may pay the tax at 0% if the income is covered by your dividend and interest allowances.

Be very careful if you hold these as accumulation units. You still need to pay income tax on any income, even though it is never paid to you directly (just rolled up into the value of the fund). So that the income is not taxed twice, when you sell, the income received during ownership is added to your base cost for capital gains tax purposes.

Some platforms keep these records for you, others do not and you need to gather the information yourself and keep meticulous records of all purchases, income and sales.

the_learner

Why are these 2 funds subject to income rather than capital gain tax?

Keep_pedalling

the_learner wrote: »

Why are these 2 funds subject to income rather than capital gain tax?

CGT only comes in to play when you sell an asset.

the_learner

I asked this question cause I wanted to find an alternative to paying income tax on my savings.
In my situation, after filling my ISA and contributing to my pension, I wanted to put the remaining money at work. If I use P2P lending, or regular saver account I have to pay more than 40% income tax on that.

So I was considerimg absolute return funds (like the Standard Life GARS mentioned above) to generate an alternative source of income. I was hoping to pay CGT on that, whenever I sell that holding.

Assume that this fund reach is target (let's say 3% per annum over 3y). Is this 3% to be treated as capital gain, thus allowing me to get that tax free (given the capital gain allowance that I am not using otherwise)?

dunstonh

the_learner wrote: »

Why are these 2 funds subject to income rather than capital gain tax?

They are subject to both income tax and capital gains tax.

Do you plan to bed & ISA?
Would a different tax wrapper be suitable?

So I was considerimg absolute return funds (like the Standard Life GARS mentioned above) to generate an alternative source of income.

Interesting choice. Not one I would use but investing as all about opinion.

the_learner

dunstonh wrote: »

They are subject to both income tax and capital gains tax.

Do you plan to bed & ISA?
Would a different tax wrapper be suitable?

I alreaddy filled my ISA for this year and possibly I will get enough money during the year to fill the next one in April 2018.
So this is some extra cash I wish to invest. But saving accounts and few P2P already used my personal allowance of £500 so I will now be subject to 40% on any extra income from my investments.

Since I have not used my capital gain allowance, it seems reasonable to make good use of that. That is why I was thinking of investing in targeted/absolute return (of course facing the associated investment risks) in order to get any income from these holding taxed as capital gain. Given my 11k allowance that would mean I can get this return tax free, instead of paying 40% on that.

grey_gym_sock

you can't choose whether a fund gives you return as income or as capital return. however, some funds do tend to give you higher income and lower capital gains, others to give you lower income and higher capital gains. in your tax situation, it's perfectly sensible to hold the former in an ISA, the latter in a taxable account.

though i wouldn't use that as a reason to buy funds you wouldn't be interested in if it weren't for tax. i'd use it to decide where to place the funds i'd like to buy anyway (i.e. higher-income funds in ISA, lower-income funds in taxable).

a US tracker is a good example of a relatively lower-income fund (mainly because US companies return a lot of cash to shareholders in the form of buybacks instead of dividends - which has the effect of giving you capital gains instead of higher income).

the GARS fund isn't something i'd go for. if you have your reasons, fine. but i wouldn't do it just for tax reasons.

the_learner

Thanks for your answer. I would buy funds anyway, to diversify. GARS is an example of absolute return I already hold and I wanted to use this to give an example. I would probably have another absolute outside the ISA.
But how can I know what a fund is distributing? I mean how can I see if the distribution was income or dividend? I get no dividend elsewhere so I would have an allowance to use as well. Only thik to avoid/minimize is income tax.

grey_gym_sock

if http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/s/standard-life-inv-global-abs-return-strategies-p-accumulation is the right fund, then that page says the "type of payment" is dividend.

the_learner

grey_gym_sock wrote: »

if http://www.hl.co.uk/funds/fund-discounts,-prices--and--factsheets/search-results/s/standard-life-inv-global-abs-return-strategies-p-accumulation is the right fund, then that page says the "type of payment" is dividend.

Thanks a lot, I didn't notice this info on HL. It is very useful. I am just wondering if it is to be considered as accurate.
A multi-asset fund, like GARS, would have also bonds in the portfolio. Wouldn't this call for some of the distributed amount to go under the income category?
I guess the question is: can a fund distribute cash under both income and dividends? All the funds I saw on HL only have income or dividend as type of payment, never both.