What to put in ISA and what unwrapped?

talexuser

Assuming all other avenues have been catered for and you have to have funds outside an ISA, what are the arguments for income vs growth and which to go where.

For example for my ISA all my funds are acc, but unwrapped I have all inc just for the simplicity of calculating dividend income.

But as part of the ISA I have three vanguard funds and wonder if these might be better off unwrapped and inc versions with relatively low dividends and instead swap my unwrapped high dividend IT payers to the ISA (simply by selling and buying)?

For information I have sold unwrapped funds to the Capital Gains limit every year to rebase and minimise CTG in the future, and don't need any dividend income now so all is reinvested.

cloud_dog

As a general thought, and assuming you are already being taxed on sources of income, I wouldn't hold any investment which created an income related event outside of an ISA and would simply hold growth investments which, as you are doing, would be managed in line with CGT limits each year.

You need to be aware that even ACC funds can create income taxable events.

EdSwippet

talexuser wrote: »

Assuming all other avenues have been catered for and you have to have funds outside an ISA, what are the arguments for income vs growth and which to go where.

This Monevator article tackles the topic:
Tax efficient investing in the UK (or what order to put things into an ISA or SIPP)

One wrinkle not mentioned in the article is the pensions lifetime allowance. Unless you are certain you will never ever reach it, that tends to argue for SIPPs before ISAs when it comes to bonds, bond funds, and probably REITs as well. Keeping the higher growth assets outside the SIPP and the lower growth ones inside should help to delay any collision with the lifetime allowance.

Tom99

[FONT=Verdana, sans-serif]Work out the total transaction cost v the tax saving. The IT will incur a buy/sell spread and stamp duty so if you were a basic rate taxpayer paying 7.5% on dividends it may take several years to break even.[/FONT]
[FONT=Verdana, sans-serif]Also can you do all the deals on the same day so that you are not out of the market?[/FONT]
[FONT=Verdana, sans-serif]Owning ACC funds outside an ISA is no more difficult accounting wise than owning INC funds. At the end of each tax year you will get a statement of dividend paid which you include in your income tax return and also add to you cost for CGT.[/FONT]

bowlhead99

talexuser wrote: »

For example for my ISA all my funds are acc, but unwrapped I have all inc just for the simplicity of calculating dividend income.

That's a sensible approach as I find it easier to track dividends when you can see them running through your regular transaction statements and when your investment costs get updated by the platform as you manually reinvest the cash, rather than there being a load of invisible income and reinvestment happening in the background.

As Tom mentions if you're investing in Acc funds unwrapped you will of course get annual statements that hopefully help you figure your overall income and tax costs but it can be tricky if you don't diligently review these and update your own personal records (perhaps because of no tax liabilities at the time they come in) and then have to do a CGT calc on a disposal several years later.

So for the way some people's minds work, at least if you see the dividend income and reinvestment transactions on a cash statement you can easily know something happened on certain dates as a reminder to make entries in your own tracking records, rather than just getting an annual income statement some months after you already disposed of a fund and wanted to know what gain you made on it.

Still, Inc vs Acc as a share class is just an aside really (as the admin convenience or inconvenience doesn't change the tax bill), as your real question is on what types of underlying assets to put in the wrapper.

But as part of the ISA I have three vanguard funds and wonder if these might be better off unwrapped and inc versions with relatively low dividends and instead swap my unwrapped high dividend IT payers to the ISA (simply by selling and buying)?

As a general rule if you can mitigate tax through allowances and exemptions outside your ISA of whatever type (dividends allowance, interest allowance, 0% starting rate for interest income, CGT annual exemption) it can be sensible to put the assets that would face more tax when unwrapped, into the wrapper.

So for example if you have plenty of capacity to make capital gains through periodic churn of your portfolio to use your annual CGT exemptions, but don't have spare interest and dividend allowances - then putting the things that generate interest and dividends into the wrapper is quite sensible, and as an order of priority, interest distributions get taxed at a higher rate than dividend distributions so funds generating those would perhaps be "first in". REITs and PAIFs would be even more 'first in' because property income distributions can't use your dividend allowance or your savings income allowance, so they might jump the queue.

The Monevator blog post linked above has some sensible pointers in that regard.

One factor if you're the type of person who will be able to max out an ISA allowance every year is: getting your ISA allowance as big as possible is a goal in itself. So for example if you were looking at investing in Scottish Mortgage or some biotech fund that might make 100% total return in a year (or three to five years) rather than a cautious bond fund that would take two decades to do the same. The 'rule of thumb' perhaps says mitigate your tax on interest distributions by putting the bond fund into the wrapper, and hope that the CGT on the growth fund can be managed...

... However after putting £20k of cautious bond fund in the wrapper, a few years later your ISA wrapper is still going to be valued in the low £20k range. Whereas if you had put the growth fund in the wrapper, the size of your wrapper might have swelled to £30k, £40k, £50k... which is very useful to then be able to stuff your ISA with more 'income generating' assets in retirement.

talexuser

Very good replies, thank you everybody. I think I have to sell the large chunks of Vanguard US and developed world ex UK and smaller chunk of Global emerging inside the ISA (also Fundsmith) and do a swap with City of London, Edinburgh and Troy outside the ISA, based on the divs. I've had the ISA for going on 25 years but only started unwrapped a few years ago.

I have to increase exposure to stocks outside the ISA because of an inheritance, and being wary of a downturn sometime am thinking of Personal Assets and Capital Partners as the opposite of my existing "outperform a tracker" punts.

Also still dithering about keeping faith with Woodford Income in the ISA since think it's becoming increasingly difficult for his figures to hold up to a five year comparison, and wondering if his picks will weather a downturn any better than others.

talexuser

Interestingly going to Vanguard direct has an account fee of 0.15% capped at £375 a year, so it looks like you are better off with iWeb assuming the OCFs are the same.