Avoiding receiving a fund dividend

aroominyork

For tax reasons I won’t go into I want to avoid being paid the next dividend on Royal London Short Duration Credit (Class M) Income held in my trading/GIA account. Its ex-dividend date is 1 August. So should I place a sell order first thing on Fri 31 July and then a (re-)buy (at the lower price) first thing on Monday 3 August?

bowlhead99

You would want to redeem your position while it included the value of that dividend, and ensure you didn't miss the cut off meaning your sell order was only accepted for dealing in August which would be ex- the value of the dividend.

Orders received by RL by noon on Friday 31 (according to the prospectus) should get that day's valuation point. Whether placing an order on your platform 'first thing' Friday is sufficiently early for them to pass the request on to RL by RL's noon cut-off is a question for your platform. You might prefer to place the order mid-afternoon Thursday instead, which would miss Thursday's noon cut off but give your platform lots of time to confirm the order ahead of Friday's deadline. Then Friday afternoon/evening, if you have enough funds in your account, you could place a new order to buy some RL shares/units, safe in the knowledge that it couldn't be accepted for Friday's dealing and would buy at the first opportunity of August, by which time the shares would be subscribed ex-dividend.

Depending on your platform, if the NAV obtained from selling the shares on Friday is not going to be known until it has been communicated to your platform by RL some time after the accounting has been done -  and you don't have any spare slush money in your account - you may have to hold off on placing the buy order for a bit.

aroominyork

Thanks. I'm with Interactive Investor so anytime up to 11am should be OK but, as you say, I might as well place the order the previous afternoon. They usually update orders overnight so I should be able to place the re-buy on the Monday morning.

[Deleted User]

Hi,

might want to check with II when monies will be available for re-buy.

When I've sold funds through them the proceeds take about three days, so out of the market for those days, unless you want to add money to your account for the re-buy then withdraw the sale proceeds.

Would be a lot easier if they just allowed a switch.

aroominyork

It would indeed be good if ii allowed switches. It is the one feature I miss from HL, but given the cost savings with ii I accept it as "the price you pay for the price you pay".

Funds with midday valuation points generally come through overnight on ii so I see no point phoning and have them give me a non-committed answer. If I miss a day or two so be it - market moves on £10k in a short duration bond fund are unlikely to cost me much.

george4064

I’m intrigued to know why you don’t want the income payment, I can only imagine it’s do with tax since it’s not held in a tax free wrapper.

aroominyork

I'm sorry my tax affairs are your source of intrigue and entertainment, George! Because of Covid I've reduced my working hours and this financial year will be a lower rate taxpayer. In normal years, where I am a higher rate taxpayer, it does not matter if I exceed my £500 Personal Savings Allowance because I pay into my SIPP and reclaim the 40% tax. But this year I will not be paying into my SIPP so do not want to exceed the £1000 allowance and this dividend payment would tip me over the £1000.

quirkydeptless

aroominyork said:

Idoes not matter if I exceed my £500 Personal Savings Allowance because I pay into my SIPP and reclaim the 40% tax. But this year I will not be paying into my SIPP so do not want to exceed the £1000 allowance and this dividend payment would tip me over the £1000.

I was a bit confused by you calling it a dividend as this fund pays interest, but I see now you are trying to keep below the savings interest allowance. 

aroominyork

No, quirky, I don't think it pays interest as such (though bowlhead may be sharpening his pencil to correct me). The fund receives interest on the underlying bonds - and if you owned each of the underlying bonds instead of owning them grouped together in a fund you would receive lots of interest payments - but the fund itself makes a distribution which is more akin to a dividend. This gov.uk link explains that the personal savings allowance covers:

• bank and building society accounts
• savings and credit union accounts
• unit trusts, investment trusts and open-ended investment companies
• peer-to-peer lending
• trust funds
• payment protection insurance (PPI)
• government or company bonds
• life annuity payments
• some life insurance contracts.

bowlhead99

The quirk is that as it's a fund whose portfolio consists of over 60% fixed interest securities, the distributions it pays (which you earn if you are a holder while the calendar flips over into the ex-div date) are allowed to be characterised as interest payments rather than as corporate dividends.

So by agreement with HMRC, the taxable nature of what it pays out  as a distribution (or accumulates, if ACC version of fund) is an interest payment. This means the fund itself won't pay tax (because its interest income is fully used up by a mixture of operating costs and this 'interest cost' paid to the shareholders/ unitholders, so it makes zero net income), but the individuals receiving the payments will be treated as if they'd received interest (rather than a corporate dividend out of the fund's net profits) from their holding of the fund.  

That's the reason that the gov.uk link talking about the interest income that gets charged at 0% within the personal savings allowance can include distributions from 'unit trusts, investment trusts and open-ended investment companies', though this is only true for those 'unit trusts, investment trusts and open-ended investment companies' whose distributions are treated as interest payments.  Other types of funds who can't guarantee that their assets will be at least 60% invested in cash and fixed interest investments at all times would have their distributions treated as normal corporate dividends, and you wouldn't be able to use the £1000 personal savings allowance. Instead you'd use the £2000 personal dividend allowance. 

Though in referring to those as 'allowances' which is the simplification on the gov websites, they are really just a band of income where the tax rate is 0%  (rather than being entirely disregarded like an 'allowance' or 'exemption') so earning £1000 of interest could still push you into higher rate tax bracket in some circumstances even if there wasn't otherwise any tax on it per se. 

Not that I'm suggesting you don't already know all this, but you did drop my name into the conversation . What you say is all true, though if taken at face value could lead other people to get confused on their own obligations depending on what they hold etc.

aroominyork

You think I didn't know all that - how very dare you!

So does an OEIC have to apply to some authority or other to approve the fund manager's undertaking that "their assets will be at least 60% invested in cash and fixed interest investments at all times" and so can be treated as interest rather than dividends? And where does one find out whether a fund is paying interest or dividends? - it doesn't seem to be on the RL factsheet which only says "Investors may be subject to tax on distributions" without saying what brand of tax. Presumably there are mixed asset funds where equities are in the high 50%s and which could fall on either side of the dividing line.