10 Mar 2017, 6:14am
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  • The taxman is coming for your dividends – ISAs are the main defence

    Young ‘uns know this already, but there are a lot of older folk who swear by share certificates and shouldn’t. My Dad was one – wouldn’t touch this newfangled nominee account rubbish when it was introduced 1. The trouble with certificates 2 is you eschew any kind of tax wrapper, which seem to be nominee only. There’s a bit more pressure on these refuseniks now because the taxman is coming for your dividends in a big way. Once upon a time, if you had dividend income that wasn’t greater that the higher-rate tax threshold 3 you could get it all tax-free. Well, last year they pulled that down to £5k a year. And from roughly this time next year it’s coming down to £2000, all due to the Budget.They are clearly after unwrapped dividend income, largely to stamp out the practice of self-employed directors paying themselves a token wage and then a massive amount in dividends. It’s worth noting that the tax on dividend income is still much lower than the tax on actually selling your time for money to an employer, 7.5% (update – I misrepresented the total here – PJ’s comment sets the record right on the need to account for corporation tax too in the case of the self-employed, though not the dividend-income shareholders) as opposed to 20%, but it’s a book-keeping nightmare for people who hold individual share certificates or people who hold unwrapped equity holdings on many platforms 4.

    Most dividend yields aren’t usually much more than 5%, so this means that you are sort of okay with up to ~£40,000 worth of shares, but why take the risk? Get your shares into an ISA 5 – and you have until 5th April to take action this year to bed-and-ISA some of these suckers. But be warned of capital gains tax, so don’t crystallise gains of more than £11k a year. If you need more than that you can do other stuff, like use your SIPP and you can also give shares to your spouse, but whatever you do do it, and do it now and early next year.

    I had a CGT gain that it’s taken me the last few years to run out into an ISA. Next tax year is my last crack at that sort of game, after which all my equity holdings will be in ISAs or SIPPs. I will still retain the empty unwrapped account if it doesn’t cost me anything. After all, you never know, we may be due for another market crash, and if I start thinking along these lines, and can raise the cash, and have the cojones, I may be grateful for more than £20k equity purchasing capacity that year. Then I will take the time to chunter that into the ISA over the following years.

    From a capital gains point of view, even if you want to maximise your ISA savings, you may be better off crystallising the existing gain in unwrapped holdings of Company X and investing 20k of the same shares in Company X in your ISA, even if it means you buy 20k worth of some different shares of Company Y unwrapped 6, because that resets the CGT clock on the unwrapped holdings. Some platforms give you a better deal on costs if you bed and ISA – TD, who I used, is one of them. But if you have share certificates then don’t putz about with that for this tax year – you usually have to get your share certificates into a nominee unwrapped account and then do the Bed and ISA from that. It’s very likely you just haven’t got enough time for the Crest forms to go through in time for this tax year end.

    You have three tax year end periods before you get hit with this – 2016/17, 2017/18 (after which the cut to 2k will happen, due in 2019) and 2018/19, so get with it.

    Listen to what’s written between the lines

    The chancellor is quite right, in that the self-employed white van folk have been playing merry hell 7 with the tax and NI system compared to PAYE employees. Last year I paid a whopping £150 to buy a year’s worth of State Pension accrual – that’s something that used to cost me thousands of pounds a year as a PAYE grunt. It’s easy to attack that sort of loophole, which is why the next tax year is the last year I will get such a good deal. I am chuffed that it is my 35th year out of 35 needed and I shall pay my £150 Class 2 NI contributions with alacrity for one last time for tax year 2016/17.

    distribution of the rise in class 4 NICs across the income spectrum (Resolution Foundation)

    But the self-employed also take the piss in another way, and that is the ‘company director’ who pays himself a pittance wage with the majority in dividends. These were the guys who were targeted by last year’s dividend tax allowance of £5000, but the tax paid is only 7.5% relative to he PAYE grunt’s 32%. As a higher rate tax payer you’re up to 32.5%, which is still a better deal when I was paying 41% (nowadays 42%) tax on PAYE when I was younger and hadn’t discovered what pension savings are there for.

    But there’s another bunch of NI mickey-takers out there, and yes, there’s a mustelid of white pelt in there too. These are the people living on a pension. There is no NI to pay on a pension, and somehow what with all the talk of fairness and the fact that Britain’s true tax rate is about 32% for basic rate taxpayers rather than the headline 20% I can see that changing in not very many years hence. First they came for the self-employed…

    There’s probably a lot more tax win to be had among the self-employed. Not the ‘self-employed’ Deliveroo drivers on zero hours contracts, it’s the “company directors” paying themselves and their wives in dividends. You gotta follow the money, and that 7.5% dividend tax level starts to sound far too low for future years, too. The Deliveroo guys don’t pay themselves in dividends, it’s the well-heeled self-employed that are in the Chancellor’s gunsights here.

    Saving equities in the uncrystallised part of my SIPP is a small way to fight back?

    One of the ideas I thought if I wanted to hold non ISA shareholdings is – what if I hold them in the uncrystallised part of my SIPP? Say I hold £1000 of Megacorp paying 10%. So I put 1000 into my SIPP and the taxman makes this up to £1250. Megacorp pays me 10%, ie £125. I drift this £125 off to my crystallised pot. Because I will always be a BRT taxpayer soon because of other income, I get to pay 20% tax, ie  £25, ending up with £100. Bugger. But on the other hand, without going through this I’d have only got 10% of £1000, which is, drum roll… £100.

    Now if I’d held that in my unwrapped trading account, and accumulated enough to pay tax on it then I get to lose 7.5%, ie end up with £92 from Megacorp p.a. I don’t have a huge need for my SIPP once my main pension starts paying out. I will save my £2880 p.a. to get my 25% boost from the taxman up to £3600. On 75% which I get to pay 20% tax, boo, hiss, but it’s still worth it, because £720-£540=£180, which is a 6.25% guaranteed ROI for two months of a year, and where the hell else are you going to get that on cash these days?

    But if for some reason I had money coming out of my ears and a 20k ISA limit was not enough, I could get a £2880 increase on that by misusing my SIPP. People who are working can do better than that, provided they become basic rate taxpayers in drawdown. Beats holding it all unwrapped and no need to sweat capital gains. If Megacorp goes up 100% I get to pay tax on the price if I sell, but hell, I bought 25% more of it at the lower price because of the taxman’s bung. The uncrystallised portion of my SIPP looks like an interesting place to hold equities after my ISA compared to an unwrapped trading account. On the downside, the potential 32% tax and NI merger could gut the value of doing that.

     

    Notes:

    1. he was a canny old boy in many ways – when he retired in the mid 1980s and the company retirement FA suggested he used unit trusts for diversification the FA got sent off with a flea in his ear because the fees on the suggested unit trusts in those days were absolutely huge. But he didn’t get PEPs or ISAs later on
    2. There are some advantages – your cost of carry is zero, and you are less likely to turn over your portfolio because of the aggravation
    3. if you had no other income
    4. if you hold loads of shares on one or two platforms each platform gives you a consolidated tax certificate for the dividends across your entire portfolio which makes the job of reporting the dividend total a lot easier
    5. If ISAs aren’t enough to contain your vast wealth then I guess you are probably rich enough to use offshore tax havens and find suitable advice 😉
    6. Or you leave it a month before you rebuy Company X
    7. they get less too, they don’t accrue entitlement to contributions based Jobseeker’s Allowance
    19 Mar 2014, 2:38pm
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  • why is the ISA season now, and what’s with the new 15k limit then?

    Hooray for an increased ISA allowance of £15,000. Now to be honest, through most of my working life, saving that sort of cash each year wasn’t really on the cards – more pressing forms of savings, in terms of paying off the mortgage, and in later years pension AVCs came to the fore. However, I have to do something with my AVC fund when I get a hold of it, and a few years of £15k allowance gets the job done a little faster. I’m kinda puzzled by the July start – does that mean I have to avoid contributing in April, but I’m sure that’ll get clearer in due course. The increased personal allowance is always welcome.

    And it seems that the artificial division ‘twixt cash and share ISAs will be abolished. Which is great – after all I want to hold a single ISA without buggering about shifting my old Cash ISA into my Shares ISA. The cash ISA is only a small rump from back in the day when I was trying to hedge against being ejected from The Firm in short order.  I’ve thought often enough about combining it into by Shares ISA, since I can’t get excited about 1% interest in a 3% inflation world, but an early retiree has to carry a large cash float. Plus there are reasons to worry about holding a lot of cash with a S&S nominee provider.

    Why do people use ISAs in such an odd way?

    Go on. Try getting one of these in London, or anywhere else, for less than £1. It was easy 30 years ago. That's how well cash holds its value!

    Go on. Try getting one of these in London, or anywhere else, for less than £1. It was easy 30 years ago. That’s how well cash holds its value!

    Four out of five ISA savers use only cash accounts. WTF is up with that? Cash is the most tedious, evil asset class, with its mendacious promise that it’ll never go down. Well, duh, yes, the number at the end doesn’t go down, but the real value decays like fresh fish. Cash dies at about 4% a year, presumably because they print that much more than the increase in goods and services that the cash is chasing. Particularly in troubled times like the seven lean years we’ve gone through.  They added insult to injury by devaluing the currency making everythign foreign dearer – from shares to iPads, though this seems to be starting to recover of late. In short, as a long-term asset class, cash stinks IMO. As an example of just how much, when I started work you could get a pint of beer in London for less than a pound. You try doing that now. As a rough rule of thumb, the value of cash halves every ten to fifteen years. This is not an asset class you can trust. The shocking volatility of stocks makes them look less trustworthy, but in the long run (>5-10 year mark) they tend to drift up in real terms, if you include dividend income. Whereas I have never known a ten year period where the value of £100 at the end has been anywhere near as much as it was at the start. The interest you’re paid on cash is an attempt to make you feel better about that bad behaviour – and then they bloody well tax you on the compensation for the loss of value due to Government behaviour, just because they can. All a cash ISA does is stop the tax bit, but time and time again I hear people say they prefer cash ISAs because they are risk-averse. Bollocks. It’s just a different kind of risk, a disguised one when the number at the bottom doesn’t fall by the value of each unit does. That’s still risk in my book, and a dishonest underhand one at that.

    Savers will be able to shield almost three times as much money from tax without taking the risk of buying shares

    Torygraph.

    Nary a whisper about the risk of it almost guaranteed to be worth less as time goes by unless interest rates exceed inflation, been a long while, that… My pension AVCs, held in cash since I left work, will have decayed in real value by 10%. Now I can’t honestly ask for people to play the violins in the background because I saved 42% tax on that and got a 20% bung from buying in a mix of FTSE100:global stocks in ’09 while the pound was being devalued by 25%, so the ermine is okay with leaving 10%+ on the table. But I do that because I have to, it’s definitely a bad idea to hold that much in cash, so exactly why 80% of ISA savers  electively hold such a rotten depreciating asset beats the hell out of me. The one thing cash gives you is optionality, but in return for the favour it leaks through your fingers over the years. I have never, ever, known any way of saving cash 1 where I could even match inflation, with the one exception of my NS&I Index-linked savings certificates, which I loaded up on just before they withdrew the blighters.

    The other area where it seems my fellow-citizens are mad is what the hell is with this Torschlusspanik about ISAs now? You’ve had eleven flippin’ months to use your ISA allowance! For starters if you are saving cash from earnings, why save it elsewhere and then into an ISA in the last three weeks, though retaining optionality and the fact you can get a better interest rate outside an ISA has something to be said for it. But for an S&S ISA? Okay, so I stiffed myself this year and last by filling up the ISA early in the year so I had to sell some of The Firm to make space for opportunities as they came up – Direct Line last year and Royal Mail this year, so you want to pace yourself. Steady as she goes monthly S&S ISA saving as you earn the money is a match made in heaven for dollar-cost-averaging – particularly if you are investing in something that’s going down the toilet. Emerging markets spring to mind at the moment 🙂 Contrary to popular belief buying when things look bad is often good for your wealth, provided you have the required intestinal fortitude,  here, here, and here 🙂

    So, ISA savers of Britain, when you get your grubby mitts on the new 15k allowance, it’s time to slap yourselves around the collective chops with a wet fish, and ask yourselves some searching questions, like

    • why are y’all 2 saving cash, in a ZIRP environment?
    • why do you leave it to the last minute? Why isn’t the ISA season in April, when you have a year ahead of you and can take advantage of saving the money as you earn it 3,  rather than March? Particularly the 20% that use S&S ISAs – you might as well get, your money working for you six months earlier on average.

    There’s n’owt as queer as folk, eh? Are we all such well-trained little consumers that we are suckers for the ‘closing down sale – everything must go‘ pitch rather than actually working out what we want an ISA to do for us? Let’s get our money put to work and gainfully employed sooner rather than later 😉

    Notes:

    1. a historical exception was in the good old days when you could borrow money from a credit card at 0% without any fees, but then any interest you can get on somebody else’s money is a good rate 🙂
    2. okay, four fifths of you all
    3. obviously if you earn £200k+ you can load up your ISA in the first month, but most of us struggle to fill an ISA in a year 🙂 Steady as she goes seems to obvious way to go in that case
    4 Aug 2012, 12:01am
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  • Why does it take so long to move an ISA?

    I have an ISA with iii, who jacked up their prices, in particular charging for funds and generally carrying on in a cavalier fashion. So more than a month ago I initiated a shift to TD Direct, telling both iii and TD, and filling out the relevant forms. iii at least revoked their exit charges for aggrieved customers transferring out who didn’t like the unilateral hike in fees.

    So far, the transfer still hasn’t competed, though it is within the specified time of six weeks. What the heck is the reason in this day and age for a transfer to take so long? I am transferring as stock rather than cash, but I now have an additional challenge in the form of a share certificate from one of my sharesave schemes that I want to shift into the ISA. I don’t dare put any money or stock into the TD ISA while the iii one still has anything in it, for fear of being hauled up by HMRC for double dipping. In fact all in all the process of transferring share accounts, within or without an ISA seems tediously drawn out and grief-stricken.

    I have a ESIP shareholding with Equiniti that I want to shift to TD in a non-ISA wrapper because Equiniti have outrageous selling fees that are avoided by transferring out within 90 days of vesting. However, The Firm’s shares are going XD in a few days and I’m avoiding a move over the XD period. There still seems plenty of opportunity for the transfer to make a right muddle of things between the XD and dividend payment date in a month’s time.

    What I need is a good Coffee Can

    The whole point of nominee shareholdings was to make computer transfers easier, but my experience of the ISA transfer is beginning to piss me off about holding shares in this way. If I can’t find a way to transfer the sharesave amount into my ISA I will hold the damned thing as a share certificate; it’s a large enough holding to be worth a grand a year in dividend income. The stock is good enough for Neil Woodford’s top ten which my HYP seems to have ended up being perilously similar to so it’s good enough for me as a core holding.

    Although paper is so yesterday, it has some attractions – it doesn’t mess you about to change nominee accounts and it doesn’t charge you any quarterly account fees. Account fees seem to be where nominee share accounts are going to – and I have become accustomed to not having them over the last few years. Guess I was freeloading on all the guys holding active funds, and this cross-subsidy is being banned by the Retail Distribution Review, which as an unforeseen consequence is going to shift the balance from electronic to paper for long term holdings. For a share that I’m going to sit on for a while as I build up my HYP ISA around it to get my sector allocation back into line there’s much to be said for paper. What I now need is a good can to stash these in, as described by Robert Kirby in his 1984 article ‘the Coffee Can portfolio” – basically stick share certificates in can, collect £1500 a year tax – free (when the second sharesave comes out in December to join this one) and forget about the tin. He said in 1984

    You can make more money being  passively active than actively passive

    Something the III experience has shown me is I want some diversity in nominee providers, and having no nominee for a significant holding is one step towards that. That way if I fall out with a nominee provider I don’t end up with my entire income stream held up to ransom. This isn’t easy with small accounts of < £10k each because you often get tapped with account fees below a certain size (with TD it seems to be £7500), and ISAs in particular are a pain to have spread around. However, I’m out of that limitation now, and after next year I will probably leave my HYP as it is and switch future years contributions to some sort of Vanguard lifestrategy fund if RDR hasn’t made funds expensive to hold. That will probably necessitate starting up with a different ISA provider to get access to the Vanguard fund.

     

    22 Apr 2010, 8:54pm
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  • Interest only mortgage – Do you feel lucky, punk? Well, do you?

    Monevator has a good post about using an interest-only mortgage as an investment tool. You have to live somewhere, and if you have the discipline then it’s a great way to build up an investment portfolio over the term of the mortgage which will pay off the capital.

    Hey, where did I hear that before? Ah yes, as a late-twenties starry-eyed young pup in the market for his first mortgage. Abbey National’s estate agents at the time, Cornerstone, sold me a mortgage. I went in wanting a repayment mortgage, like my Mum and Dad used to have. Lovely LAUTRO saleswoman, Sue she was called, gorgeous green eyes…

    “You can do better than that. with an endowment you just pay the interest, but look at this Friends Provident with profits fund. Look at these lovely growth figures. At the end of your 25 years you’ll have twice as much in the endowment as you’ll need to pay off the capital”

    Sucker. I was had. These were the years of Gordon Gekko, Greed is Good. Beware pretty saleswomen promising the earth. I was single, so the one benefit of an endowment, the life insurance part, was worthless to me or anyone I cared about. But 100% profit in 25 years, well, that had me. That’s the takeaway message I got, I am sure somewhere in the fine print there was the usual past history is no guarantee yadda yadda. But I was lost to the green eyes and the promise of lots of moolah. I hope it was the moolah that swung it rather than the eyes…

    A few years later, the house underwater on the mortgage, Friends Provident demutualised and I got seven grand. Which, having gotten wiser, I paid down to the capital. On the principle that there were now nasty shareholders rather than cuddly mutuals so I would be ripped off and enjoy poorer with profits performance, so I better at least use it to reduce my interest payments.

    Then the letters came saying “sorry old chap, but we were a tad overoptimistic in our predictions it seems. You, mate, will be lucky to get half towards your capital, so you better raise the amount you’re putting into our rotten with profits fund to catch up. Ta-ra”. Or words to that effect. I saw red and wrote the MD of Friends Provident a stinking letter telling him their salesperson had promised me a guaranteed return. He, or rather some lowly grunt on his behalf, wrote back after a while saying “no we didn’t, but you can moan to us, then the Ombudsman if you like”

    So it was that after moving I ended up with an interest only flexible mortgage from those nice people at Birmingham Midshires. Nobody wanted to sell me a repayment mortgage in those heady days of the dotcom boom.Every year I’d pay off a lump I’d saved to reduce the capital.

    Some lengthy time later, Friends Provident settled with me to put me back in the position I would have been had if I’d taken a repayment mortgage, which was sixteen big ones they’d lost me in ten years. I paid this towards the capital of the new house. No foreign holidays, kitchen refits or cars were involved here 🙂 Having screwed up royally in the dotcom boom I learned, do not churn, sit on your hands, and continued to pay down the mortgage. From 2003 I changed tack, and started investing in a dead boring Legal & General tracker fund, using some of the money I’d otherwise be putting into the mortgage capital repayments. That did help me steal a march on the mortgage, and it 2006 I reduced the mortgage to the minimum BM would allow me to have. This was a flexible mortgage, so I could ring them up, and they would transfer to me any amount from 10k up to my overpayment into my bank account by BACS.

    People often advocate an offset mortgage, where your savings with an institution are offset against your mortgage, so if you have a mortgage of 100k and savings of 50k you only pay interest on 50k. That sounds great, except in the credit crunch. Because the small print says they can forcibly use your savings to pay down some of the mortgage. So the general rule is never hold your stash of cash with the same organisation or banking group that holds your mortgage. This happened to someone I know, which screwed them royally.

    I liked the disconnect of the flexible mortgage. Although I used shares ISAs to save my capital (effectively doing myself what Friends Provident had so miserably failed to do on my behalf) I never tackled this with the intent and savvy that Monevator proposes. But I can vouch that it works, I paid my mortgage down with about 10 years left to run. And paid the mortgage company  less than a tenner a month while I mulled over whether I wanted to discharge it. Monevator would make a good case that I shouldn’t have, I could have invested in 2008 and made a mint, and indeed could have had 11 years more use of this cash, currently at rock-bottom rates. But I don’t have his edge and ambition, and in the end I wanted my house to be truly mine.

    2007 mortgage  statement.

    2007 mortgage statement. BM didn’t get fat off my back that year 🙂

     
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