tax on distributions for non-Isa funds

tellme_why

Hi,
I am totally confused with how taxation works for non-Isa, non-pension investments and in particular whether equity funds care to minimise the amount of distributions or not.
US equity funds sell their equity holdings before these holdings pay dividends to the fund hence minimise dividend distributions and maximise capital gains and can use up the CGT allowance.
I cannot read of any funds in UK that does this type of optimisation because everything focus on pension funds and Isa funds?
Is the only solution to this problem avoiding investing in funds (wrappers) and invest in a portfolio of shares selling manually before the divi is paid (lots of admin work!)?

Linton

Dividends are taxed as a form of income separately from Capital Gains. Exactly how they are taxed depends on whether they are classified as dividends or interest. Funds may or may not pay out the dividends/interest they receive from their underlying investments. However in both cases the dividends/interest are taxable.


As far as I know funds do not sell and buy to avoid receiving dividends. Surely if funds did that the large number of sells and subsequent buys would result in the difference between the pre-dividend and the post-dividend price of the underlying investments being eroded, which is hardly in their investors interest.


Perhaps the difference between the US and UK arises from a higher % of companies in the UK paying dividends. And also dividends may be subject to higher tax in the US, especially taking into account the UK £2000 dividend tax allowance.

londoninvestor

Linton wrote: »

Dividends are taxed as a form of income separately from Capital Gains. Exactly how they are taxed depends on whether they are classified as dividends or interest. Funds may or may not pay out the dividends/interest they receive from their underlying investments. However in both cases the dividends/interest are taxable.


As far as I know funds do not sell and buy to avoid receiving dividends. Surely if funds did that the large number of sells and subsequent buys would result in the difference between the pre-dividend and the post-dividend price of the underlying investments being eroded, which is hardly in their investors interest.


Perhaps the difference between the US and UK arises from a higher % of companies in the UK paying dividends. And also dividends may be subject to higher tax in the US, especially taking into account the UK £2000 dividend tax allowance.

Also (perhaps more so than in the US) the "equity income" style is attractive to many UK investors, and funds which minimised dividends would go against what those investors are looking for.