Question about taxation in general investment account

deeboy12

I was wondering if anyone might be able to help me get my head around taxation of funds/ ITs in a GIA as I'm struggling to work out how to use my dividend allowance efficiently and avoid additional income tax/ excess reportable income obligations.

My questions are basically:

• If I buy any anything that is less than 60% equity, am I right in thinking that I would actually have to pay income tax on the distribution rather than treat it as dividends and take advantage of the dividend allowance?
  
• Does the excess reportable income rule only apply to funds or does it apply to investment trusts too - so for example, if I buy an investment trust that pays no or low dividends, could I liable for ERI there too?

The background is that I feel my cash balance is currently too high (at approx. 7 years of expenses) and I'm looking to put some of it into my general investment account to do something/anything instead of sitting there earning nothing.

Currently there is just £45k in my GIA in Vanguard Life Strategy 80. The historic dividend yield is 1.29% so I guess that uses up approx. £600 of my £2k dividend allowance.

I'm looking for something less volatile to put a further £60k into, as I will likely want to convert it into cash at some point (after a minimum 5 years holding period), that will help me use more of my dividend allowance and not incur additional tax.

I'm considering something lower risk that has given an inflation beating return over the last five years like VLS40 or a wealth preservation trust such as CGT or PNL (all around 1% yield/ average annual return of 5% over last five years) but open to other ideas too. (I could obviously buy a gold ETC such as SGLN which doesn't pay any income but that's too volatile for what I'm looking for in this particular account.)

For completeness, my pension and ISA are maxed out, I'm now a basic rate taxpayer, and I have a small position in a couple of VCTs that I don't plan to add to.

Cheers and thanks for any guidance!

jimjames

One question, are all your maxed out ISAs S&S or cash? If cash then you may be better off switching to investments to get the tax benefit. 

Or equally if investments then make sure the ISAs have the holdings that generate most income so that covers as much allowance as possible. Different ways to structure to get most benefit but really depends what you're holding already.

deeboy12

jimjames said:

One question, are all your maxed out ISAs S&S or cash? If cash then you may be better off switching to investments to get the tax benefit. 

Or equally if investments then make sure the ISAs have the holdings that generate most income so that covers as much allowance as possible. Different ways to structure to get most benefit but really depends what you're holding already.

Thanks jimjames - yes the pension and ISA are all invested with approx. 75% equity exposure. So I'm really just trying to work out if I can deploy some excess cash more efficiently to take advantage of the dividend allowance to beat inflation but without taking too much risk.

Linton

Q2) An IT is just a company like any other.  It happens to make its profits by investing and trading in shares but that is irrelevent to you as an investor. It pays out dividends/interest to its shareholders in the same way as a Tesco share would and is taxed in exactly the same way.  

ColdIron

deeboy12 said:

• If I buy any anything that is less than 60% equity, am I right in thinking that I would actually have to pay income tax on the distribution rather than treat it as dividends and take advantage of the dividend allowance?

From memory if a fund has more than 60% bonds then the distribution is interest. So VLS 40 pays a dividend and VLS 20 pays interest

• Does the excess reportable income rule only apply to funds or does it apply to investment trusts too - so for example, if I buy an investment trust that pays no or low dividends, could I liable for ERI there too?

AFAIK ERI usually applies to offshore funds and ETFs

https://monevator.com/excess-reportable-income/

Eco_Miser

If I buy any anything that is less than 60% equity, am I right in thinking that I would actually have to pay income tax on the distribution rather than treat it as dividends and take advantage of the dividend allowance?

It's less than 40% equity, and the distribution counts as interest, and therefore can be set against the £1000 Savings Allowance along with your bank interest.

deeboy12

Thank you everyone for the replies, very helpful.

Linton - that makes sense, thanks!

And very useful to know I can hold a 40% equity fund in the GIA and still make use of the £2k dividend allowance without risking going over my £1k savings allowance (cheers Eco_Miser and Cold Iron!)