Last year, the Chancellor radically overhauled the tax reporting system for investments such as equities and fixed interest securities. This could have an effect on people holding equity or bond funds held in a collective investment account.
For many years, the position was fairly simple. Basic rate tax was taken at source from both dividends and interest received from investment funds. The investor then needed to work out if they were a higher rate tax payer and pay the additional rate of tax if this was the case (usually via their accountant).
We designed clients’ financial plans so that higher rate tax payers did not have large amounts in these portfolios. We then used income units for lower and basic rate tax payers to help boost their portfolios in times when dividends were high but markets might be falling – this particularly suited our level one and two risk strategies.
The big change from April 2016 was that dividends and interest are no longer taxed at source within investment fund portfolios meaning everyone may have a duty to report interest or dividends paid by income units within their non-ISA portfolios.
The Chancellor set a ‘free’ dividend amount of £5,000 for share based funds. This means that any dividends received under this amount do not get taxed (remember to include dividends from any other sources in this calculation). Dividends over the £5,000 allowance are taxed at 7.5% for basic rate tax payers, 32.5% for higher rate and 37.5% for additional rate payers.
The Chancellor also set a ‘free’ interest allowance of £1,000 for basic rate tax payers and £500 for higher rate. The recipient only pays tax on interest above these allowances at the usual income rates of 20%, 40% or 45% – they have to actually complete a tax return and declare this.
All of this means that your tax voucher figure (if you hold a collective investment account) could be important.
We have spent the past year meeting with our clients and moving any large collective investment accounts to other wrappers where possible – to try and help them stay under these allowances. We have also been gradually moving ‘income’ units that produce dividends and interest to ‘accumulation’ units to greatly reduce any reported income within our ‘Proactive’ portfolio rebalances.
However, if you are at all unsure of your tax position, we are happy to chat things through with you. Ultimately, we would recommend that you see an accountant for firm clarification of your tax reporting requirements, but we can at least give you an initial idea of your likely responsibilities.
The new Chancellor has said that the dividend allowance will drop to just £2,000 from next tax year. However, this is yet to be confirmed. I hope this article has helped clarify the position for clients holding investment funds outside of ISAs, Pensions or Investment Bonds.