The differential in the amounts of tax paid on income versus capital gains should be a key consideration when creating a portfolio across multiple accounts such as a SIPP, GIA and ISA and deciding which investment assets should go in which accounts.
According to FE Trustnet as of the 25th May 2019, the three-year return on the HSBC FTSE ALL World Index for a sterling investor was 53%, of which approximately 6% was earned as dividends and 47% came from capital gain.
An investor who put £50,000 into the accumulation units of this on the 24th May 2016 would have £76,500 as of 25th May 2019, making a profit of £26,500.
Investor A put the investment into her flexible drawdown SIPP, having already drawn the tax-free cash sum, and from where she regularly draws more than £50,000 p.a. She wants to draw the profit out to spend it and would pay 40% income tax: £10,600 tax.
Investor B put the investment into his GIA. As a 40% income tax payer he would pay £975 in income tax on dividends earned. If he made no other capital gains that year he would pay £2,300 in capital gains: £3,275 tax in total.
Investor C put the investment in the GIA of his partner who earned no other dividends, and then split the holding with his partner before sale. Neither of them made any other capital gains in the year, and so would pay no capital gains and no tax on dividends: zero tax.
Paying less tax means higher after-tax spendable income or more retained capital.
Tax issues will depend on everyone’s individual circumstances. Future tax rates, allowances, tax types and the tax treatment of savings and pension accounts will be subject to change. Tax planning needs to be a regular ongoing process.
Non UK resident tax payers will need to get advice on the taxes payable in their country of residence.
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