Tax on non ISA investments

[Deleted User]

My partner is thinking of making an investment in a tracker fund outside an ISA, as he's fully maxed in his ISA. Currently, he's paying a lot of tax on pensions and savings interest as he's used up all his PA and PSA.

What he's thinking of doing is to divert some of his savings capital into a tracker fund. Is he right in thinking that any gains from this investment could be offset against the £2k of dividend income, and any excess will be taxed at 7.5%. ie he will be gaining an extra 2K of tax allowance and any possible excess taxed at a lower rate instead of 20%.

Also, when will tax become liable for payment - is it every year or when the funds are sold.

Any advise/comments to help us make an informed decision would be much appreciated.

Dazed_and_confused

You seem to be confusing income tax and capital gains tax.

Is he investing in a tracker fund that pays dividends?

eskbanker

[quote=[Deleted User];discussion/5974379]What he's thinking of doing is to divert some of his savings capital into a tracker fund. Is he right in thinking that any gains from this investment could be offset against the £2k of dividend income, and any excess will be taxed at 7.5%. ie he will be gaining an extra 2K of tax allowance and any possible excess taxed at a lower rate instead of 20%.[/QUOTE]No, they're two separate unrelated strands of taxation.

Investment gains are only subject to capital gains tax once the investment is sold, and at that stage the gain is compared to the prevailing annual allowance (£11.7K at the moment) and any excess taxed.

Dividend income is compared with the £2K dividend allowance (strictly a nil-rate band) when calculating the annual income tax liability, but that £2K can't be applied to anything else.

[quote=[Deleted User];discussion/5974379]Also, when will tax become liable for payment - is it every year or when the funds are sold.[/QUOTE]As above, annually for dividends, but only on sale for taxable capital gains.

[Deleted User]

Dazed_and_confused wrote: »

You seem to be confusing income tax and capital gains tax.

Is he investing in a tracker fund that pays dividends?

I know the difference between income tax and capital gains tax - if I gave you the impression that I'm confusing the two, than I haven't explained my self clearly enough. Sorry about that. OK - let me try a different way.

Currently, he has a VLS60 acc. ISA fund, and as explained earlier, cash in savings accounts. What we're trying to understand is by moving some cash into another tracker fund (outside ISA) he will be able to offset any gains against his capital tax allowance. And as Estbanker said, this will become payable when the funds is sold. By moving cash from his savings accounts and into a tracker fund, he will reduce his tax liability on his overall savings interest, and if the gains on his investment are lower than the CG allowance, than there will be no further tax to pay. Also, if the fund is an ACC fund, there there is no dividend liability. Would this be correct?

ColdIron

[quote=[Deleted User];75555106]Also, if the fund is an ACC fund, there there is no dividend liability. Would this be correct?[/QUOTE]No. Dividends are taxable and just because you choose to retain them in the fund does not change this, you are still the beneficiary

Dazed_and_confused

If there is a capital gain then yes he has an annual capital gains allowance which could mean there is no capital gains tax to pay on the gain (profit).

If he has less taxable interest then yes he will potentially save some income tax.

If he doesn't earn any dividends (or accept additional shares in lieu of a dividend) then there can be no dividend tax payable.

[Deleted User]

ColdIron wrote: »

No. Dividends are taxable and just because you choose to retain them in the fund does not change this, you are still the beneficiary

This statement appears to be in contradiction to what Dazed and Confused said in his reply. Can either of you please clarify further?

[Deleted User]

Dazed_and_confused wrote: »

If there is a capital gain then yes he has an annual capital gains allowance which could mean there is no capital gains tax to pay on the gain (profit).

If he has less taxable interest then yes he will potentially save some income tax.

If he doesn't earn any dividends (or accept additional shares in lieu of a dividend) then there can be no dividend tax payable.

Yes - he will have less taxable interest by diverting his cash savings into an investment. He will then be able to offset his profits against CG allowance.

Can you please explain your last sentence? If he invests in an ACC fund then no dividend will be paid, but if he invests in an INC fund, then dividends will be paid and these can then be offset against the 2K div allowance. Is that correct?

ColdIron

[quote=[Deleted User];75555376]This statement appears to be in contradiction to what Dazed and Confused said in his reply. Can either of you please clarify further?[/QUOTE]No contradiction, if you don't receive dividends there is no dividend tax. Inc(ome) funds distribute dividends so you would see them paid into your account as cash, with Acc(umulation) funds your dividends are retained within the fund and increase its value. Either way you benefit from the dividend so they are taxable
[quote=[Deleted User];75555407] If he invests in an ACC fund then no dividend will be paid[/QUOTE]Not so. Dividends are paid just not as cash into your account

[Deleted User]

ColdIron wrote: »

No contradiction, if you don't receive dividends there is no dividend tax. Inc(ome) funds distribute dividends so you would see them paid into your account as cash, with Acc(umulation) funds your dividends are retained within the fund and increase its value. Either way you benefit from the dividend so they are taxable

Sorry - I must be misunderstanding something here.

This statement by Dazed and Confused....'If he doesn't earn any dividends (or accept additional shares in lieu of a dividend) then there can be no dividend tax payable.'

Doesn't this statement contradicts what you just said? Surely, if div are reinvested by increasing the fund units, than they become part on CG when the fund is sold. Sorry, we're still trying to learn!!

badger09

ColdIron wrote: »

No. Dividends are taxable and just because you choose to retain them in the fund does not change this, you are still the beneficiary

It is easier to keep records of dividends, which you need to do for unwrapped investments, if you choose the Inc variety as they are shown separately.