Bonds via funds

MK62

masonic said:

I've explored a range of funds to see if it would help explain the differences in taxation. Here is a summary of the results:

HL Multi-Index Cautious paid no corporation tax, but only made notional distributions as it only has Acc units, so the theory about physical distribution of income can be discounted.

The L&G annual reports showed a breakdown for taxation and included overseas tax. I thought for a moment that some of the other funds might have been listing overseas tax as "corporation tax", but L&G Multi Index 3 showed separate amounts for overseas tax and corporation tax.

One further thing that is interesting is that the amount in equities vs fixed interest seems to matter. VLS 20 paid no corporation tax, but VLS 40-80 did. The same trend is seen for HL Multi-Index, but not L&G Multi-index or HSBC Global Strategy. Perhaps the lowest equity version of these was still over a %-equities threshold for some or all of the year in question? The latter series are volatility managed, not fixed %-equities.

Given that there are examples of pure bond funds of funds and very low equity mixed asset funds of funds that did not pay corporation tax, it seems to be the asset mix rather than the fact they are funds of funds that is important.

I think the most striking thing is the comparison between VLS 20 and VLS 40. These are pretty much identical in all respects other than the weightings of the holdings. One paid corporation tax and the other did not.

......VLS100 paid no corporation tax either though....🤔.....it also seems odd that VLS 40, 60 and 80 all have their overseas tax offset under "Double Taxation Relief", but VLS 100 does not.....since the holdings in VLS100 are also reflected in the others, to varying degrees........and VLS20 apparently paid no overseas tax at all.

Another question arises too, around the tax treatment of "fund of funds" OEICs.......where the underlying funds may have already paid tax.....

MK62

Compound_2 said:

Of the bond-heavy funds not liable for tax, it seems most have charges that are uncompetitive compared to HSBC Global Strategy. The exception is VLS20 although even this may not win against Global Strategy Cautious on performance.

Would we now say a 50:50 split between VLS100 and VLS20 might be better than VLS60? Could combining VLS20 with a standard global tracker be more desirable than Global Strategy Balanced?

History does bear that out.......an investment in VLS60 over the last 5 years returned 27.3%, whereas the same investment, split equally between VLS20 and VLS100 would have returned 30.6%..........however the reason(s) for that would need to be investigated more deeply (it can't just be assumed to be solely attributable to this tax thing.....there could be (and probably are) several other factors in play)

masonic

MK62 said:

masonic said:

I've explored a range of funds to see if it would help explain the differences in taxation. Here is a summary of the results:

HL Multi-Index Cautious paid no corporation tax, but only made notional distributions as it only has Acc units, so the theory about physical distribution of income can be discounted.

The L&G annual reports showed a breakdown for taxation and included overseas tax. I thought for a moment that some of the other funds might have been listing overseas tax as "corporation tax", but L&G Multi Index 3 showed separate amounts for overseas tax and corporation tax.

One further thing that is interesting is that the amount in equities vs fixed interest seems to matter. VLS 20 paid no corporation tax, but VLS 40-80 did. The same trend is seen for HL Multi-Index, but not L&G Multi-index or HSBC Global Strategy. Perhaps the lowest equity version of these was still over a %-equities threshold for some or all of the year in question? The latter series are volatility managed, not fixed %-equities.

Given that there are examples of pure bond funds of funds and very low equity mixed asset funds of funds that did not pay corporation tax, it seems to be the asset mix rather than the fact they are funds of funds that is important.

I think the most striking thing is the comparison between VLS 20 and VLS 40. These are pretty much identical in all respects other than the weightings of the holdings. One paid corporation tax and the other did not.

......VLS100 paid no corporation tax either though....🤔.....it also seems odd that VLS 40, 60 and 80 all have their overseas tax offset under "Double Taxation Relief", but VLS 100 does not.....since the holdings in VLS100 are also reflected in the others, to varying degrees........and VLS20 apparently paid no overseas tax at all.

Another question arises too, around the tax treatment of "fund of funds" OEICs.......where the underlying funds may have already paid tax.....

Well VLS100 is 100% equities, so it didn't receive any interest income. Only interest income seems to be subject to corporation tax in multi-asset funds, not dividends. What isn't apparent from that table is that the proportion of corporation tax to gross income goes down as % equities goes up.

The foreign double taxation relief is puzzling, it appears on the surface to be a benefit of being multi-asset, but the corporation tax on interest dwarfs it, so overall there still appears to be a tax inefficiency to mixing equities and bonds.

It would be interesting to look into the tax paid by the underlying funds. I might dig into that this evening.

MK62

masonic said:

MK62 said:

masonic said:

I've explored a range of funds to see if it would help explain the differences in taxation. Here is a summary of the results:

HL Multi-Index Cautious paid no corporation tax, but only made notional distributions as it only has Acc units, so the theory about physical distribution of income can be discounted.

The L&G annual reports showed a breakdown for taxation and included overseas tax. I thought for a moment that some of the other funds might have been listing overseas tax as "corporation tax", but L&G Multi Index 3 showed separate amounts for overseas tax and corporation tax.

One further thing that is interesting is that the amount in equities vs fixed interest seems to matter. VLS 20 paid no corporation tax, but VLS 40-80 did. The same trend is seen for HL Multi-Index, but not L&G Multi-index or HSBC Global Strategy. Perhaps the lowest equity version of these was still over a %-equities threshold for some or all of the year in question? The latter series are volatility managed, not fixed %-equities.

Given that there are examples of pure bond funds of funds and very low equity mixed asset funds of funds that did not pay corporation tax, it seems to be the asset mix rather than the fact they are funds of funds that is important.

I think the most striking thing is the comparison between VLS 20 and VLS 40. These are pretty much identical in all respects other than the weightings of the holdings. One paid corporation tax and the other did not.

......VLS100 paid no corporation tax either though....🤔.....it also seems odd that VLS 40, 60 and 80 all have their overseas tax offset under "Double Taxation Relief", but VLS 100 does not.....since the holdings in VLS100 are also reflected in the others, to varying degrees........and VLS20 apparently paid no overseas tax at all.

Another question arises too, around the tax treatment of "fund of funds" OEICs.......where the underlying funds may have already paid tax.....

Well VLS100 is 100% equities, so it didn't receive any interest income.

True, for VLS100 it's all dividend income and bank interest.......but VLS40, 60 and 80 also have dividend income and bank interest, not just interest from bonds.....and those dividends are received from pretty much the same companies/subfunds as in VLS100, so it seems puzzling that all the overseas tax is relieved in VLS40,60 and 80, but none of it is relieved in VLS100, and no overseas tax was paid at all by VLS20, despite it having some dividend income from the same companies/subfunds.

Only interest income seems to be subject to corporation tax in multi-asset funds, not dividends. What isn't apparent from that table is that the proportion of corporation tax to gross income goes down as % equities goes up.

The foreign double taxation relief is puzzling, it appears on the surface to be a benefit of being multi-asset, but the corporation tax on interest dwarfs it, so overall there still appears to be a tax inefficiency to mixing equities and bonds.

It would be interesting to look into the tax paid by the underlying funds. I might dig into that this evening.

It seems odd that VLS20 has no corporation tax liability, and so can distribute all it's income, but VLS40,60 & 80 all do, and so can only distribute income net of tax, and then VLS100 is back to having no corporation tax liability, and so is back to being able to distribute all it's income.......is the asset mix a red herring here, as far as corporation tax goes? If, as you say, only interest seems to be subject to corporation tax (as it appears is confirmed in the Abrdn guide on OEIC tax guide), that would explain why VLS100 has no corporation tax liability (since it has no bonds, and so no interest), but it doesn't explain why VLS20 also has no corporation tax liability - 80% of it's assets are bonds, generating interest.........we are clearly missing something here, some key piece of information!

All the VLS funds (as well as the Target Retirement Funds) are subfunds of the Vanguard Lifestrategy Funds ICVC.....could it be that this is the actual company we should look at?