What is a "franked" dividend in the UK?

koru

I have just printed off my Consolidated Tax Certificate from Interactive Investor and it has two new columns which are marked "% Franked” and “% Unfranked". Does anyone have any clue what "franked" means for UK tax purposes in the 2017/18 tax year?

Wasn't franked investment income abolished in 1999? I have tried googling, but the only references to franked dividends seem to be under Australian tax law. I can't see any sign that the term franked has any meaning at all in the UK, currently.

If it helps, Interactive Investor is saying that my dividend from Vanguard US Equity Index Accumulation was 94.67% franked, whereas my dividend from Troy Trojan O Accumulation was 100% franked.

II does provide a definition of franked %: "The proportion of the dividend distribution, which is received as Franked/Unfranked Investment Income." This isn't much help, as I already know what % means and they don't tell you what they mean by franked.

george4064

All U.K. dividends are subject to a 10% dividend tax, however this is claimed by the government at source so it gets deducted before income is paid to shareholders.

I can only imagine that franked income means that is is net of the 10% tax whereas unfranked mean it hasn!!!8217;t been taxed yet..

Note this is a corporate dividend tax and has nothing to do with individual shareholder circumstances etc...

bowlhead99

george4064 wrote: »

All U.K. dividends are subject to a 10% dividend tax, however this is claimed by the government at source so it gets deducted before income is paid to shareholders.

I can only imagine that franked income means that is is net of the 10% tax whereas unfranked mean it hasn't been taxed yet..

Note this is a corporate dividend tax and has nothing to do with individual shareholder circumstances etc...

This seems to be misinformation based on a misunderstanding of the old tax credit system, there is no such thing as a 10% dividend tax claimed at source. If OP knows what ACT and FII is/was, they may have a better understanding of the history of how the (now archaic) one-ninth tax credit came about, than George...

However in short I think the notes on the tax voucher doesn't really mean anything important to you as an individual.

For corporates though, after ACT was abolished in 1999 the concept of FII still existed because a company might have had surplus ACT above its capacity to offset against corporation tax, and that surplus could be carried forward indefinitely to offset against corp tax in future periods, which led to a set of 'shadow ACT' rules with notional ACT, to determine the extent to which the carried forward surplus ACT could be set off. So ACT didn't completely die. Also, even after abolition of the full ACT system when distributions didn't really create franked *payments*, the distributions could still give rise to franked investment *income*, which would feature in the "marginal relief" calcs for smaller companies getting their lower corporation tax rate under small profits relief. Though they haven't had a special small profits rate since 2015... except for certain oil companies under ring fence rules...

The terminology for FII might more properly be referred to as qualifying /qualified investment income, but still only relevant to corporates (including receivers who are themselves OEICs).

If you read the full prospectuses of UK OEICs, they might make reference to how they don't generally pay tax on their dividend income that they receive from investments, and the part of the dividend they in turn pay out which generally relates to dividends received will still be treated like FII with no further tax to pay by a corporate recipient. However, there may be some remainder of their income which doesn't qualify and when paid out to a UK corporate, might be withholdable (with a tax credit) and taxable in the hands of the corporate recipient.

So that split between franked and not franked income is something a corporate investor might need to consider, and perform calculations based on the percentage split given, but not relevant to an individual such as yourself. Because individuals like yourself just pay tax on the whole gross income.

Some prospectuses are still in the dark ages with comments about basic rate individual taxpayers having no further tax liability etc., so you can't believe everything you read in a prospectus. But generally it seems to be the case that corporates with their general exemption from corporate tax on most types of dividend income do/did need to carve up the income between franked and other income.

If you are still awake...

Both Troy and the Vanguard US fund are UK resident OEICs but it might be that the Vanguard fund has some side income from derivatives or stock lending, which is 'income' but not the type of mainstream corporate dividend income that can be passed on downstream to corporate investors of the OEIC with a total exemption from tax. So, a split is shown, though it doesn't affect you, if your account with the platform is a private individual one investing in your own name rather than through some company you set up.

LHW99

I can only say Wow! Bowlhead

grey_gym_sock

bowlhead99 wrote: »

Both Troy and the Vanguard US fund are UK resident OEICs but it might be that the Vanguard fund has some side income from derivatives or stock lending, which is 'income' but not the type of mainstream corporate dividend income that can be passed on downstream to corporate investors of the OEIC with a total exemption from tax.

the vanguard fund will have some income from US REITs. perhaps that counts differently.

bowlhead99

grey_gym_sock wrote: »

the vanguard fund will have some income from US REITs. perhaps that counts differently.

You may be right, as it would not be a completely standard UK or non UK corporate dividend, so maybe the "real estate profits" distributed by US REITs are treated differently. REITs would not be as much as 5%+ of the index, but they do typically pay a higher yield than the average index member so maybe they are a more significant % of the overall dividend after fund expenses.

I'm not too well up on exactly which income types the OEICs might receive that prevent the OEIC's dividend being seen as FII as it's not really been important to me as an investor (and I haven't done a tax exam since the ACT regime was in the process of being ended, dammit now I feel old).

koru

Thanks, I do remember studying ACT and FII, but didn't realise there's still a similar concept for corporate shareholders.