Tax On Non ISA Investments

Chris75

Unit Trusts & Investment Trusts held outside of an ISA.

I am for the first time going to hold unit trusts & investment trusts outside of my ISA. I think that I know the answers but I would like to be sure

Hopefully any unit trust or investment trust that I own will get dividends from the shares that it holds. Do I, in a non ISA situation, have any tax liability for the dividends that those holdings receive or only for the dividends that they declare and pass onto me.

I believe that Capital Gains comes into play when I sell any of those investments but not as long as I keep holding them. I also believe that I need to keep records of purchase prices so as to be able to calculate an "average" purchase price of that holding when I sell any of them. Am I right?

Is there any roll over relief when I sell one holding & immediately buy another?

I have looked at the HMRC site but to me it is a clear as mud.

talexuser

Income tax - yes. This tax year you have £5000 of dividends as allowance before paying tax, next tax year will go down to £2000 if finance bill is passed. Basic rate tax on dividends is 7.5%, 32.5% if you go into higher rate.

Capital gains - yes, if the gain over original price is more than £11300, 10% to pay in basic band, 20% in higher band. And yes, the starting price is the average price you paid for a series of buys, compared to the price when you sell.

sorcerer

On the dividend side, it's not a clear cut as you think, different types of dividends attract different types of Tax. For example a P2P investment pays "Interest" dividend, which you pay at 20%. Investments in Property (REITs), can split dividends into capital returns and normal dividends treated different for tax purposes.


But if you are holding "Normal" dividends, then they come under the £5000 dividend allowance.

talexuser

O/P did specify unit trusts and investment trusts.

Chris75

For my clarity.

Does the income tax liability only arise on dividends that the unit trust or investment trust pay out to me

or

do I also have some liability on dividends received by the unit trust/ investment trust regardless of what they do or do not pay out to me?

AnotherJoe

If you dont receive them, there's nothing to declare.

Dazed_and_confused

And if you receive them it can easily increase your tax bill even when less than £5,000.

No tax to pay on the dividend itself but that dividend income is all still taxable income, there is no "allowance" it's just a 0% tax rate, so plenty of people will find their tax bill will be higher even when the dividends received are less than £5,000. Strange but true.

EdSwippet

AnotherJoe wrote: »

If you dont receive them, there's nothing to declare.

Shading that just a little... if you buy accumulation units of a unit trust you won't actually receive the dividends, but they are nevertheless something you have to pay tax on each year. Monevator has the details here. Accumulation units can also produce even more of a capital gains tax headache than income units.

In general it is going to be much simpler if you restrict accumulation units to SIPPs and ISAs, and hold only income units outside of shelters. You pay income tax on dividends from income units only when you receive them.

Chris75 wrote: »

Is there any roll over relief when I sell one holding & immediately buy another?

No. As a rule, then, you will want to try and use as much of your annual capital gains allowance as you can each year.

The best way to do that would be to sell and re-buy some or all of a holding with a built-in gain to reset its basis. Of course, the government puts pointless barriers in the way of this, in the form of the 'bed and breakfast' rule. There are however several ways around this -- sell in taxable and buy in an ISA or SIPP, you sell and your wife buy, or simply sell one unit trust and buy another that holds the same stuff (exchange one fund provider's FTSE UK all-share tracker for one from a different provider, for example).

ColdIron

Your general investment account provider should produce a Consolidated Tax Certificate every year detailing your dividends received/retained including any overseas dividends if applicable

Edit: Leaving Certificate spelled as Pertificate got to me

Chris75

Dazed_and_confused wrote: »

And if you receive them it can easily increase your tax bill even when less than £5,000.

No tax to pay on the dividend itself but that dividend income is all still taxable income, there is no "allowance" it's just a 0% tax rate, so plenty of people will find their tax bill will be higher even when the dividends received are less than £5,000. Strange but true.

So tax would be payable on the part of any dividend income that took you me into a higher tax rate or over the £17500 savings allowance threshold? If it did not change my tax bracket nothing extra would be payable up to £5000 (£2000 2018/9)?

bowlhead99

Chris75 wrote: »

If it did not change my tax bracket nothing extra would be payable up to £5000 (£2000 2018/9)?

Correct

Chris75 wrote: »

So tax would be payable on the part of any dividend income that took you me into a higher tax rate or over the £17500 savings allowance threshold?

In certain circumstances.

Say for example your income is £10,000 of employment (salary or pension income or self-employed business profits) and then £7499 of interest income from bank accounts, p2p loans and maybe some investment funds invested in bonds (which pay interest distributions instead of dividends).

That is all covered by your £11,500 personal allowance, the £5000 band of "starting rate for savings income" of 0%, and £999 of your £1000 available personal savings allowance.

Dividend income sits 'on top' of your other types of income. So when you receive a bunch of dividends, it doesn't displace any of that savings income - i.e. it doesn't push the employment or savings income out of their existing brackets (personal allowance, starting rate 0%, personal savings allowance). It just sits on top. If the amount of dividend income is only £1000 or £2000 or £3000 or £4000 or £5000 it would all get covered by the £5000 dividend allowance. If it is £5100, then £5000 of it is covered by the £5000 dividend allowance and £100 is charged at the dividend rate for a basic rate taxpayer. The dividend tax rate for a basic rate taxpayer is 7.5%. So there would be just £7.50 tax to pay on the dividends, and no extra tax to pay on the salary or interest.

In that example, you've exceeded the '£17500 savings allowance threshold' that you mentioned, but that is not really a change of 'tax bracket' as such (in terms of basic rate 20%, higher rate 40%, additional rate 45%); the magic £17500 threshold is not a tax bracket in itself, just a combination of allowances and special rates/reliefs that might be useful to some people, and none of them go away just because you £5000 (or even £5100) of dividends on top.

However, if the dividend income really causes you to change tax brackets you might find you pay more tax because at some level of earnings, some allowances or reliefs might be lost.

Let's say in a different example you had total income from salary or pension and interest from different sources which took you up to £44500 grand total income. As you probably know, the threshold for high rate tax is 40%. You pay whatever tax you need to pay on that lot and it's all at 0% or 20%.

Then you receive some dividends: £1000, £2000, £3000, £4000, £5000. You might have been thinking that it's all covered by your dividend allowance so no dividend tax to pay, and as mentioned before, dividends sit 'on top' of the other income types, so you won't be pushing any other types of income up into the higher tax brackets...

However, as someone with a gross income of £45500-£49500, you are clearly no longer a basic rate taxpayer you are a higher rate taxpayer. As a higher rate taxpayer, you are no longer entitled to a £1000 personal savings allowance. You only get a £500 personal savings allowance. That means £500 of the interest income that was previously covered by the basic rate personal savings allowance, will no longer fit into it.

The interest income generally still fits in the basic rate tax bracket as the only thing you have in the higher rate tax bracket is dividend income sitting on top of all the other income. So the rate at which the interest income should be charged is 20%, i.e. £100 extra tax to pay on that £500 interest income that no longer neatly fits into the PSA.