Tax treatment on dividends

Johnnyboy11

Tom99 wrote: »

[FONT=Verdana, sans-serif]Dividends are subject to income tax not CGT. You take the dividend actually paid during the tax year so, for example, you could sell a fund/share which has gone ex-div in 2019/20 but not receive a dividend until 2020/21.[/FONT]
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Thanks Tom99. That's a valid point, however I believe that dividends (or notional distributions) can be added to the Allowable Costs for the CGT calculation, otherwise you get taxed twice (Dividend Tax and Income Tax) in that tax year.

Tom99

Johnnyboy11 wrote: »

Thanks Tom99. That's a valid point, however I believe that dividends (or notional distributions) can be added to the Allowable Costs for the CGT calculation, otherwise you get taxed twice (Dividend Tax and Income Tax) in that tax year.

I assume you are talking about ACC units? I see your point but the date on which you can add the dividend to your costs for CGT must be the same date you have to add it to your income for income tax otherwise the dividend would be 'tax free'.
Assuming I am correct about the date a dividend becomes taxable to income tax (the date it is actually paid) then the same date would apply to adding it to CGT cost.

Johnnyboy11

But if you do as you suggest, then you wouldn't include the 'declared-but-not-paid dividend' as an Allowable Cost in the CGT calculation, so in effect its value would subject to Capital Gains Tax that tax year, and also subject to Dividend Tax that tax year, so double taxed.

Tom99

Johnnyboy11 wrote: »

But if you do as you suggest, then you wouldn't include the 'declared-but-not-paid dividend' as an Allowable Cost in the CGT calculation, so in effect its value would subject to Capital Gains Tax that tax year, and also subject to Dividend Tax that tax year, so double taxed.

No because you sold the ACC units before the dividend pay date you would not be deemed to have received the dividend so no dividend/income tax.
If you sold INC units after the ex-div date your sale price would have dropped when the units went ex-div so a lower capital gain but you would receive the dividend which would be subject to income tax.
I have just had a look at my tax certificate and the ACC unit dividends are listed as the pay date not the ex-div date.

Heedtheadvice

Not holding them in an ISA (or other tax free wrapper)? If not ask yourself why not (even partially) if possible.


The issue then becomes irrelevent!!

Johnnyboy11

Heedtheadvice wrote: »

Not holding them in an ISA (or other tax free wrapper)? If not ask yourself why not (even partially) if possible.


The issue then becomes irrelevent!!

I'm working on the SIPP/ ISA thing, should all be under wraps on or shortly after 6th April


Thanks Tom99, I'm still not sure about the handling of the CGT calc. when Acc. Units were sold between the Ex. Dividend date and paid date, but lets leave it there for now.

talexuser

It is somewhat confusing, I have some unbundled Fundsmith Inc. A dividend was paid on the 2 Aug of ~£250, but the note said dividend of ~£130 with no mention of equalisation. So the ~£130 goes in the dividend total for the tax year and ~£250-130= ~£120 is the equalisation which gets deducted from the capital gains for the tax year

EthicsGradient

Johnnyboy11 wrote: »

I'm still not sure about the handling of the CGT calc. when Acc. Units were sold between the Ex. Dividend date and paid date, but lets leave it there for now.

The ex div date has no meaning for your tax return at all. If you sell the units before the paid date, then nothing linked with that paid date appears on any tax return, income or capital gains. If you sell them after the paid date, then you put the amount as income on an income tax return, and can deduct it from the buying cost for a capital gains tax return.

This does assume you didn't buy any new units in the period leading up to the paid date, so that your notional dividend is a pure dividend, not part 'equalisation'. That would complicate things ...

Johnnyboy11

EthicsGradient wrote: »

The ex div date has no meaning for your tax return at all. If you sell the units before the paid date, then nothing linked with that paid date appears on any tax return, income or capital gains. If you sell them after the paid date, then you put the amount as income on an income tax return, and can deduct it from the buying cost for a capital gains tax return.

This does assume you didn't buy any new units in the period leading up to the paid date, so that your notional dividend is a pure dividend, not part 'equalisation'. That would complicate things ...

That all makes sense to me, however, the bit I struggle to get my head around is...
The Dividend and any Equalisation never actually leave the ACC Fund or actually get paid to me, so what happens to the Dividend that my Units earned up to the Ex. Dividend Date, when I still owned them? For CGT purposes, why is a Dividend declared any different to a Dividend paid, I won't see either, other than reflected in the Unit price when I actually sold?

bowlhead99

Johnnyboy11 wrote: »

That all makes sense to me, however, the bit I struggle to get my head around is...
The Dividend and any Equalisation never actually leave the ACC Fund or actually get paid to me, so what happens to the Dividend that my Units earned up to the Ex. Dividend Date, when I still owned them? For CGT purposes, why is a Dividend declared any different to a Dividend paid, I won't see either, other than reflected in the Unit price when I actually sold?

Maybe easier to start off thinking through how Inc shares work:

If you had the Inc units then when they reach the ex div date the NAV drops and from that point you will make a lower capital gain if you sell. The reason the NAV drops is because the money has been officially designated to belong to you rather than the fund; by holding until the ex div date you have qualified to receive cash in your hand. You are definitely going to get that money - although you have not yet received the income as far as the tax man is concerned (because income tax is levied on a payments received basis rather than on accrued unpaid dividends).

So if ex div date and payment date straddled a tax year end you have a choice: you could exit the Inc fund with low sale proceeds (and a low gain) in year 1 and the rest of 'your' cash as taxable income in year 2. Whereas if you sold the day before ex div date you would exit with more cash and a higher gain in year 1, and no div in year 2.

For Acc units, you are right that the cash never leaves the fund. In the comparable situation of ex and payment date straddling tax year end, you will not get the opportunity to exit with low cash and low gain in year 1 because whether you exit before or after the ex date, the NAV doesn't drop. You get the same high sales proceeds and high gain, immediately before and after the ex date. Though if you wanted to engineer yourself to get a lower gain in year 1, you could choose to just sell fewer than all of the shares.

Then in year 2, the dividend 'payment' date happens. From the official payment date of the Acc fund onwards, you officially have some income which is taxable as income but can be added to your cost of purchase of the units you hold, reducing your gains on the same sales proceeds. If you had already sold the units before the payment date (whether before or after the ex date) you wouldn't be around to be given the income, because no income is physically paid - you can only get it by holding units...