Use of Dividend tax allowance

Pat38493

Am I right to think that if I purchase an ETF that pays dividends like HMWO, just before the dividends validity date (can't remember the technical term), I will get the full dividend payment even though I didn't own the ETF for the full period (albeit that I'll pay extra for the ETF as everybody knows that the dividend is due shortly)?

This could allow me to use up my dividend tax allowance in a GIA if I have already used up my other tax allowances in the tax year?  Does this make sense to do?  I guess I would have to make sure I was not worse off, either by selling the ETF shortly after at a profit, or keeping it long term?

Strummer22

Pat38493 said:

Am I right to think that if I purchase an ETF that pays dividends like HMWO, just before the dividends validity date (can't remember the technical term), I will get the full dividend payment even though I didn't own the ETF for the full period (albeit that I'll pay extra for the ETF as everybody knows that the dividend is due shortly)?

This could allow me to use up my dividend tax allowance in a GIA if I have already used up my other tax allowances in the tax year?  Does this make sense to do?  I guess I would have to make sure I was not worse off, either by selling the ETF shortly after at a profit, or keeping it long term?

For all shares, funds etc that pay dividends: if you hold them at the ex-dividend date, you will get the full dividend.  

ColdIron

If you own the stock on the ex dividend date you have the right to the dividend. If you are a basic rate taxpayer you have a £500 'allowance'. This could save you £43.75 tax. Of course the share price will then drop and the usual market movements could work against you anyway, as would any trading costs. With an ETF you could open yourself up to Excess Reportable Income (ERI) reporting, I won't use ETFs in a GIA because of the hassle which is worse in dividend paying ETFs (both ERI and dividends) and stick to Investment Trusts

Gaming trading on dividends is unlikely to be a fruitful activity

NickBFS

You will also have to take into account any equalisation adjustment (which has the effect of reducing your share dividend and increasing your capital gain liability) and, of course, you will have the hassle of ERI, as Coldiron mentioned. All of this assumes that your ETF as UK reporting status.

Pat38493

ColdIron said:

If you own the stock on the ex dividend date you have the right to the dividend. If you are a basic rate taxpayer you have a £500 'allowance'. This could save you £43.75 tax. Of course the share price will then drop and the usual market movements could work against you anyway, as would any trading costs. With an ETF you could open yourself up to Excess Reportable Income (ERI) reporting, I won't use ETFs in a GIA because of the hassle which is worse in dividend paying ETFs (both ERI and dividends) and stick to Investment Trusts

Gaming trading on dividends is unlikely to be a fruitful activity

For sure not, but if the alternative is to earn savings interest and pay 40% tax on it, even if I just managed to break even on the investment and an willing to keep it for long enough to do that, I would theoretically save a small amount.  If the investment grows I could also take advantage of cap gains allowance in the same tax year.

The context here is that I will probably have about £90K that I need to do something with during 2 tax years until I can get it all into ISAs.  Further, if we downsize the house, I would then have quite a bit more that will take several more years to get into ISA.  Therefore there's a good chance I will have to deal with all these tax issues on GIA at some point.

Ref Investment Trusts - you are saying that Ibvestment Trusts would never incur ERI?

NoMore

90k ? Do you really need to maximise returns for two years ? Just stick it in premium bonds (50k max so 90k covered you and wife). No tax to worry about.

NickBFS

Pat38493 said:

Ref Investment Trusts - you are saying that Ibvestment Trusts would never incur ERI?

It is a question of domiciliation. UK-domiciled funds (whether investment trusts or other forms of mutual funds) do not incur ERI. Theoretically, UK-domiciled ETFs would also not give rise to ERI, but there are no UK-domiciled ETFs. If you want to avoid the hassle of ERI, you could invest in UK-domiciled index funds which are more or less equivalent to your ETFs.

I would have thought that this whole discussion would be more at home on the savings and investment board rather than the pensions board, though.

kempiejon

Once ISAs and SIPP are done Premium Bonds were my first parking slots for unsheltered cash to minimise tax liability. There are the tax-exempt savings plans offered by friendly societies but the limits are fairly low and I found researching them a bit opaque. I've used short-dated, low coupon gilts, trading below par, to try and stay within allowances. The capital gain is predictable, is tax free and low coupon means the interest amounts are small.

RogerPensionGuy

I have been thinking about using GIAs to hold units that are income/dividend and trying to understand how it would pan out.

Thinking Vanguard LS100% Income may be as good as any, its X dividend date is 3rd April and it pays out end of next month/May, I have learned the x dividend date is the tax event so that's nice to know.

I have obviously been sleepy at the wheel thinking CGT allowance would be helpful/easy for me, but CGT tax free allowance has reduced 75% in just a few years from 12.3K to 3K and now I see dividend tax free allowance the same, 2K to £500 in just a few years.

I am currently feeling the tax rate of 8.75% on dividends is maybe a reasonable option for me, but don't like the 33.75% rate as income goes up.

***
https://www.gov.uk/tax-on-dividends

Pat38493

NoMore said:

90k ? Do you really need to maximise returns for two years ? Just stick it in premium bonds (50k max so 90k covered you and wife). No tax to worry about.

True, but according to the calculator on this site, you will most likely be worse off than just sticking it in the highest available savings account, even after tax paid. (unless you get very lucky and win a big prize).

ColdIron

Pat38493 said:

ColdIron said:

If you own the stock on the ex dividend date you have the right to the dividend. If you are a basic rate taxpayer you have a £500 'allowance'. This could save you £43.75 tax. Of course the share price will then drop and the usual market movements could work against you anyway, as would any trading costs. With an ETF you could open yourself up to Excess Reportable Income (ERI) reporting, I won't use ETFs in a GIA because of the hassle which is worse in dividend paying ETFs (both ERI and dividends) and stick to Investment Trusts

Gaming trading on dividends is unlikely to be a fruitful activity

For sure not, but if the alternative is to earn savings interest and pay 40% tax on it, even if I just managed to break even on the investment and an willing to keep it for long enough to do that, I would theoretically save a small amount.  If the investment grows I could also take advantage of cap gains allowance in the same tax year.

Investments are not a substitute for cash but assuming this is excess cash it makes sense to me to invest with a lower rate of tax particularly for income. However the mention of buying at or around the ex dividend date and selling soon after made me think you were indulging in short term trading. The current paltry dividend 'allowance' is now so low it's barely worth factoring in

Ref Investment Trusts - you are saying that Ibvestment Trusts would never incur ERI?

Yes. You would pay stamp duty for UK domiciled IT purchases but not foreign ones (Jersey, Guernsey etc)