Income Tax on Vanguard Lifestrategy account question

Dr_Wu

Hi, can't believe I've never really thought about this before but here goes!

We invested about £35K in a VLS 60 account (not as part of an ISA) back in 2020. Since then the markets have been a bit all over the place, the value of our fund increased by about £5K in the first year, fell back to break even and has recently started to increase again. This is all fine and to be expected and we're in it for the long run (10 years+). I was wondering if anyone knew how UK income tax was levied in these circumstances. I know you can earn £1000 interest a year tax free on savings but how does it work when, as in my case, you earn £5K one year on investments and then effectively lose it again the next as markets fluctuate?

Thanks in advance

Steve

Dazed_and_C0nfused

ISA's are for tax free/exempt interest.

Non ISA accounts generate taxable interest.  Which may be covered by your Personal Allowance or one of the 0% tax rates.  But it's still taxable income.

There is no tax consequence until you crystallise the gain or lose.  Then you will be into Capital Gains tax territory, not income tax.

Albermarle

Investments are totally different from savings. They are subject to Capital Gains Tax and Dividend tax, although you can gain certain amounts each year without paying tax.
With a sum of £35K invested it is unlikely that any tax will ever be due though.( although limits that might be changed in the fiscal review later next week )

The easy solution is to invest only within a S& S ISA or a pension, as they are exempt from these taxes.

dunstonh

Income Tax on Vanguard Lifestrategy account question

There isn't such a thing as a Vanguard Lifestrategy account.   You appear to be mixing up several things.

Vanguard have a fund range called lifestrategy.     They also have an investment platform.  The two things are seperate.  

I was wondering if anyone knew how UK income tax was levied in these circumstances.

As you didnt use an ISA and haven't bed & ISA since, you will be subject to dividend tax on the dividends and capital gains tax on the gains.   Both of which have a nil rate tax band.  If you are not receiving dividends elsewhere, then its unlikely £60k would generate enough dividends to exceed the dividend allowance.   It is also unlikely £60k on 2020 would have to worry about CGT yet.     Bed & ISA should be looked at as the ISA is tax free.  Bed & Pension also potentially depending on your objective (the pension tax wrapper beats the ISA wrapper if the timescale is suitable.  Both of which beat unwrapped, which is what you have).

I know you can earn £1000 interest a year tax free on savings but how does it work when, as in my case, you earn £5K one year on investments and then effectively lose it again the next as markets fluctuate?

VLS60 doesnt pay interest.   So, the PSA doesn't come into it.

jimjames

Dr_Wu said:

 you earn £5K one year on investments and then effectively lose it again the next as markets fluctuate?

You don't "earn" £5k on investments unless you sell and that could then trigger capital gains tax (CGT). The fluctuation of value has no bearing on tax until you sell. Income tax might be due on dividend income if it's held outside an ISA but there is currently an allowance of £2k per year for that although the budget might change both that and the CGT allowance.

ColdIron

VLS pays dividends, and not interest, which are liable for tax annually, though there are various 'allowances' so you may not actually pay any tax

There is no Capital Gains tax liability until you dispose of (sell) some or all of your holding so there is no annual liability as prices fluctuate. Again there is an 'allowance' which might result in no tax being payable

If possible you should look to shelter this within an ISA so you are not troubled by any of this in the future

MX5huggy

The £1000 is not relevant that’s for interest in savings, not dividends or capital growth on investments. 

On dividends you pay Dividend Tax but you have a £2000 allowance, £35K of LS60 won’t have generated anywhere near £2000 of dividends https://www.gov.uk/tax-on-dividends

When you sell your holding (all or some of it) you will realise a capital gain (or loss). This is taxed using Capital Gains Tax you have an annual allowance of £12300 for this https://www.gov.uk/capital-gains-tax

You can’t carry over this allowance so once you see a gain close to £12300 you may decide to sell LS60 taking your gain then you can buy something else very similar say 50% LS80 and 50% LS40 and repeat. 

You probably have Accumulation units of LS60 (the dividends are reinvested) for simplicity you could swap to Income units then the dividends are given to you as cash and keeping track is easier. 

Putting the money in an ISA or SIPP removes all this hassle but you should be able to run an unwrapped investment of £100k plus without creating a tax liability. 

Dr_Wu

Thanks for all the prompt replies, every day's a school day as they say!

Also nice to see Dunstonh still posting here, that's a heck of a lot of good quality, helpful information shared for free over the years. Much appreciated.

BoyJohn811

Hi all, I am hoping this thread is still active. I am in a somewhat similar situation, having a LifeStrategy 60% in a GIA as I have already maxed out my ISA. I am aware that capital gains tax is only due when I actually sell (and perhaps I could do this bit by bit over few years to avoid tax); however, I am more interested in how to calculate dividends - especially now that the dividend tax allowance is getting lower. Is there an online calculator where I can enter the fund, dates and number of shares or something like that and it will calculate the dividends earned? Thank you very much.

ColdIron

You should receive a Consolidated Tax Certificate from your platform each year detailing dividends and equalisation payments amongst other things. It will be exact and can be used for tax purposes

If you only started in the current financial year you won't have one yet but should sometime May to June

BoyJohn811

Thanks ColdIron for the reply. Would these reports from Vanguard arrive on time before the April deadlines in each tax year? I assume if it comes too early then it will not cover the full tax year and if after April then it will not make it much easier for calculation, or am I missing something? Thanks.