Picking the right growth funds for lower taxation?

C_Mababejive

Im not fully aware of how gains from investment in collective investment vehicles (funds/IT/ETF) are taxed other than if a dividend is paid then the dividend is taxable? Is it as simple as that?

My situation is that i would like to deploy more cash which wont fit into my ISA but i dont need the income for it and would therefore like to deploy it as tax efficiently as possible. Would this be in an acc fund for example or perhaps there are some good ITs that dont pay big divis?


Im quite happy to buy and hold long term (10 years?) and let all the gains role up as i dont need the money now. I just need to deploy money,obtain growth and minimise tax. All thoughts welcome..

eskbanker

Outside ISAs, dividends are indeed taxable but you have an annual allowance (strictly a nil-rate band) of £2K on which you pay no tax so can rack up quite a bit before that becomes an issue.

Capital gains tax is more likely to be an issue for unwrapped holdings over the long term - the annual allowance is currently £12K there, so at the point of selling, if your gains since buying are above that, you're taxed on the excess.

S&S ISAs shelter investments from either of those taxes but if you have used up your ISA allowance then the most prominent tax-avoiding route is a SIPP, if you're prepared to commit the money until you're 55 (or whatever the equivalent age is in future).

There are also various specialist niche investments offering tax breaks, such as venture capital trusts, but these typically involve higher risk than mainstream vehicles and products.

Acc variants of funds don't offer any different tax treatment from Inc equivalents, but in terms of your title of "picking the right growth funds for lower taxation" and trying to minimise dividends, it sounds like you may be letting the tax tail wag the investment dog - it would generally be considered sensible to plan investments for the best net return, rather than aiming specifically to minimise tax as such....

over_the_top

I agree about not letting the tax tail wag the investment dog. But what you could do is: first work out what collective investments you want to be holding overall, and then arrange it so you only hold some of the ones which pay relatively low dividends outside ISAs.

To keep it simple, I'd also aim to limit collective investments outside ISAs to UK-domiciled Inc funds and investment trusts. Because for them, what you're paid is the same as the taxable dividend (well, except that part of the first dividend received after buying a UK-domiciled Inc fund may be equalisation, which isn't taxable income). It is harder to see what your taxable dividends are for Acc funds and non-UK funds (including ETFs).

C_Mababejive

You see what i was thinking is that tax is all part of the overall return. I mean i might be happy to hold a company share if i can receive the divis with 7% tax but i might consider the investment less favourably if i had to pay 32% tax on the dividend. So if i held a shate that paid 5%, it might be better for a number of reasons to swap it for a fund that is skewed toward growth and only paid a divi of say 1.5%.

eskbanker

C_Mababejive wrote: »

You see what i was thinking is that tax is all part of the overall return. I mean i might be happy to hold a company share if i can receive the divis with 7% tax but i might consider the investment less favourably if i had to pay 32% tax on the dividend. So if i held a shate that paid 5%, it might be better for a number of reasons to swap it for a fund that is skewed toward growth and only paid a divi of say 1.5%.

But a fund skewed towards growth is more likely to give rise to a CGT liability, so it may be a completely false move to reduce income tax on dividends if that's outweighed by higher tax on capital gains!

As you say, there are a number of reasons/factors to consider but there are plenty of variables that prevent a one-size-fits-all right answer so you'll need to model what's likely to be best in your own circumstances, including size of pot to be invested, duration to hold for, your personal tax situation, risk tolerance, desired holdings, etc....

C_Mababejive

Thanks all,, yes ,,who knew that having money would be so tricky. It would be really useful if there was an on line income tax calculator much like the HMRC SA one,so that you could slot in for example future or existing tax year data and make adjustments before the year end closes.

eskbanker

C_Mababejive wrote: »

Thanks all,, yes ,,who knew that having money would be so tricky.

Those who've posted over ten thousand times on here over a ten year period?

C_Mababejive wrote: »

It would be really useful if there was an on line income tax calculator much like the HMRC SA one,so that you could slot in for example future or existing tax year data and make adjustments before the year end closes.

At the risk of labouring the point, it's not just about income tax though.

Calculating dividend income for a given year should be a simple multiplication for each investment held, and then overlaying the tax bands (and your personal tax status) onto the total to derive income tax liability isn't particularly complex.

However, growth is much harder to evaluate, as it'll be significantly less predictable and more volatile than divi income, but you should still be able to make some assumptions on which to model. CGT liability can be mitigated if you have the luxury of being able to liquidate holdings over multiple tax years....

It still seems to me that you're probably overthinking this, but perhaps it'll simplify things if you explain which options you're actually considering, rather than looking at this as an abstract concept?

New_World_Man

I think OP is taking the view that dividends can’t always be avoided (and tax thereon) whereas CGT can, to an extent, be controlled if you take any gains over a period of time.

I can understand the thinking behind the question if he has ran out of tax sheltered options.

Alas I can’t suggest how to answer it but I do think it is an interesting question.

[Deleted User]

eskbanker wrote: »

CGT liability can be mitigated if you have the luxury of being able to liquidate holdings over multiple tax years....

With this in mind, how do you calculate gains for CGT when liquidating fund units which had been purchased over a number of years and at different prices. The whole process seems so daunting and puts me off investing outside ISA's. I'd appreciate if someone can offer some explanation.

ColdIron

You use the weighted average cost. Broadly, add up the number of shares or units. Add up the separate purchase costs including transaction fees and stamp duty (if any). Divide one by the other. Takes maybe 30 minutes in Excel from scratch if you have your contract notes. Ideally you would keep a running total in Excel that you can keep up to date as you buy and sell. Before you ask, sales do not affect your weighted average cost

C_Mababejive

New_World_Man wrote: »

I think OP is taking the view that dividends can’t always be avoided (and tax thereon) whereas CGT can, to an extent, be controlled if you take any gains over a period of time.

I can understand the thinking behind the question if he has ran out of tax sheltered options.

Alas I can’t suggest how to answer it but I do think it is an interesting question.

Yes i think there is a bit of this in my thinking. Once tax is paid for eg via SA,well its gone for good never to come back whereas if its managed as a CGT issue,well you can always realise some gains year on year.

True our situations are eased year on year by raising of personal allowances, expansion of basic rate bands and such like etc.
Regarding doing predictive SAs ,well im gradually getting to grips with it but maths is not my strong point.

I suppose that for the moment whilst ive got PAYE income, i want to optimise my gains/income by leaning toward growth investments which are lower in yiled and diverse,thus lowering the tax take,then when i retire, if im lucky to reach that age ,well i can ease off and generate more right upto the top edge of the BR tax limit. I mean,who wants to pay lots of tax ? But i also see, that im far from being an expert so i value everyone elses thoughts and accept that i might be talking a certain amount of rubbish.