Dividends + CGT in funds

CRAIGSVILLE1

Hi all,
Am I correct in saying, that If I was to invest outside my ISA allowance for the year in a fund , and the fund made £2K in dividend payments, and £12K profit ,these gains are tax free using my dividend + CGT allowance for the year? Or do dividends count towards overall CGT ? 
Would it  be ok to sell part of a fund at the end of the tax year ( £12 k ) , and my fund would reset back to zero for next years CGT allowance? 
Very confused  :-( 

Thanks

Craig

bowlhead99

Partly right. Dividends are a type of income so are dealt with under income tax entirely separately from capital gains taxes.

Assuming by 'fund made £12k profit' you mean that after already taking the £2k dividend (which is within the allowed amount to pay 0% income tax on the first £2k of dividends), the value of the fund has gone up by £12k... then yes you could sell the fund for £12k more than you paid for it, making a £12k 'capital gain' which would be exactly within your annual exempt amount for capital gains.

The important thing to realise for CGT is that they only consider a gain to be gain when it is 'realised'. Gains that you haven't officially taken because they are just theoretical, on-paper gains and you haven't sold your investment yet, are not counted.

If you buy a fund for £100k and it goes up in value to £112k, then you could cash it all in and make the £112k profit (12% on what you invested, nice). Then you would make a £12k capital gain. Then you could buy something else with the proceeds and when you go into the next tax year you can have another £12k annual exemption.

But if you only want to get your hands on the £12k of cash and not sell the rest of it, you will not have made £12k capital gain in the eyes of the tax man, because most of the shares are unsold. 

For example if you only want to extract £12k of cash, you'll only be selling 12/112ths of your holdings at that point, for example selling 1,071 out of 10,000 shares that you bought for a tenner each and sold at £11.20 each. Those shares would give a gain of 12/112ths of the total £12k gain that you could have made if you'd sold the entire investment. Most of the gains would still be tied up in the investment, and if you keep making gains at that high rate every year, while only cashing in a slice of the profit and not all of it, you may end up in a situation where if you do sell all the shares at once you get a lot more than £12k of gain in that last tax year.

You could realise all your gains at once if you take action to sell everything and rebuy something different (like sell shares of Apple and buy shares of Microsoft, or sell a Vanguard global equities fund and buy a BlackRock global equities fund, etc). But only selling a bit, only gets you a bit of the gains you'd make if you sell it all. And selling it all can be a hassle.

CRAIGSVILLE1

Thanks for that great info bowlhead99 
Great explanation.  
Just trying to get a headstart on how to best use my 25% TFLS from my pension in the future to maximize tax free income out with my pension fund. 
So far ,  max his + her ISA's with dividend return income, put most of the rest in another fund to produce £2k dividends,  and sell if near the £12k profit. Invest in another similar fund after selling. Put max back into pension, and draw £11850 from pension from personal allowance.
Any extra at 20% tax.
Any other tips for maximising tax free income?
£1000 interest  from savings? Might stretch to that .

Thanks

Craig

bowlhead99

You may have some misunderstandings

a) If you are within the basic rate taxpayer bands (including dividends and capital gains) the tax on capital gains is 10% not 20%;  the tax on dividends is 7.5%.  So not sure where the 'any extra at 20% tax comes from' as the rate of tax on dividends isn't 20% and the rate of tax on capital gains isn't 20% either unless you are higher rate bracket (i.e. 50k+ of income and capital gains)

b) £11850 from pension from personal allowance seems outdated - personal allowance is generally £12500 unless you have given 10% of it to your spouse

You mention using his and hers ISAs so there are two of you. So when looking at money outside the his and hers ISAs, why are you looking to 'put most of the rest in another fund to produce £2k dividends'? Why not in other funds split between his and hers for £2k each, equals £4k, and £24k of potential capital gains.

You also mention looking to get more tax free income such as £1k of interest income within allowance (x2 perhaps if there are two of you).  Probably better to generate more overall growth in wealth after tax, or focus on meeting your objectives, rather than concentrating on the income or gains being tax free.

For example if you can invest in equity income funds that can give you an income while growing in real terms at or above the rate of inflation while the dividends are only taxed at a low rate, that's more useful than putting it in cash where you might fit the interest income into your personal savings interest allowance at 0% but there is a lot less income and growth than in an equity fund.  Or if you were investing in a high yield bond fund because you wanted to generate the maximum amount of interest possible to use up the £1k per person savings interest allowance, you are taking a bigger risk than if you just used a savings account and earned lower returns but didn't risk the capital.
So 'how to get tax free income' isn't as comprehensive a question to ask yourself as how to meet your overall goals.

For example, do you even need to take the 25% lump sum all at once? If you are only going to invest the money again outside a pension and have more than you can comfortably fit into ISAs this year and next, why not leave it in the pension. It can keep growing and when you pull out your money each year just have 25% of each withdrawal be tax free. As the pension assets will grow over time, you will get to draw a larger amount for the 25% tax free the longer you leave it. More total tax free income is generally better, if leaving it doesn't put you in danger of hitting your lifetime allowance and you are still making use of your ISA allowances.

CRAIGSVILLE1

Thanks again bowlhead99 :-)

£11850 !!!  - I must be a couple of years behind , lol

Yes, 2 of us, I didn't think of splitting it for the 2 x £2k dividends + CGT - thanks.

The 20% tax figure was the tax I would have to pay on after I take the £12500 from my pension each year + after I use dividend money + CGT interest.

I have considered, just leaving most of my pension as it is, and just taking out what I need + ISA's, which you say is probably better to do.

Thanks

Craig