A reader is unclear about the tax benefits of individual saving accounts (Isas), and asks: “It might seem odd, but I am still confused about one of the benefits of Isas and have seen different explanations in different places, so I would be grateful if you could clarify. Some people say that no tax is payable on dividends from shares received within an Isa, but I have also heard that no tax is payable on income from bonds, but is on dividends from shares, and therefore the advantage is only on a capital gain. If there is no anticipation of a capital gain over the tax limit then is it better to keep away from Isas because of the charge?”
Danny Cox, chartered financial planner at Hargreaves Lansdown, says:
“From 6 April 2016, there is no tax on any dividends or interest income, or capital gains tax liability on profits from an Isa. The income, profits and proceeds are entirely and completely free of all income and capital gains taxes. Prior to 6 April 2016, the taxation of dividends from UK shares was different and it involved a tax credit, which could not be reclaimed. While there was no personal tax liability on the dividend income, the technicality was such that the income wasn’t [technically] tax-free. This led to some confusion.
“An Isa also has other tax benefits, the main one being that none of your Isa holdings, their income or profits needs to be recorded on your tax return. Apart from making the tax return easier, this means the income from an Isa does not count towards other potential tax issues, such as the loss of personal allowance from income in excess of £100,000. However, the value of an Isa does count towards the value of an estate for inheritance tax purposes.”
Gary Smith, financial planner at Tilney Bestinvest, replies:
“This is a question that was often asked, as up until 6 April this year investment Isas had to be described as ‘tax-efficient’ rather than ‘tax-free’ due to the taxation of dividends.
“While those who had investment Isas did not actually pay any income tax on dividend payments received within their Isas, they could also not reclaim the 10 per cent tax credit that was attached to the dividends they received. However, after 6 April 2016, with the [notional] 10 per cent tax credit now removed – any dividends received within the Isa are completely tax-free. In reality, there is effectively no change from the previous situation.
“In respect of charges, I would point out that there should be no difference in charges between investing in equity and bond funds within an Isa compared with investing in the same funds out of an Isa wrapper.
“We would always encourage investors to fund their medium- to long-term savings in an Isa rather than a direct investment, to benefit from the tax-free benefits they provide.”
Buy-to-let: make it pay
I read the article “Buy-to-Let: Make it pay” (18 March 2016) which was very useful, and I have a question. In the section “Tax tactics”, you explained how rental income could be put in the name of a basic-rate taxpayer, adding: “But note that how you fix it at the outset cannot be changed later.” What did you mean by that? I currently have rental income in my name, but will be getting a good pension. At that point I was planning to move the property into my wife’s name, as her pension is much smaller. Are you saying I can’t do that? I can’t see why. JS
As we mentioned in our recent article, how you own the property with your spouse/civil partner can yield tax (both income and capital gains) savings. If one spouse does not earn an income, the tax savings from putting the rental income in their name could be considerable.
Where a property is jointly owned, unless HMRC is informed that the income should be taxed on an unequal basis, the income will automatically be treated by HMRC as belonging to the joint owners in equal shares and will be taxed as such. This will happen even where you own unequal shares of the property as tenants in common, or where there is a beneficial entitlement to a greater or lesser proportion of the income. If a property is arranged in unequal shares of 75:25, both spouses/civil partners will be entitled to receive the income arising in that exact proportion and they can ask HMRC to tax them the same way too.
Nimesh Shah, partner at Blick Rothenberg, says: “If spouses/civil partners do not want a 50/50 split, the couple can declare the income split according to each person’s beneficial entitlement. This can be done using HMRC form 17 (www.gov.uk/government/publications/income-tax-declaration-of-beneficial-interests-in-joint-property-and-income-17). But once the election on form 17 is made, it cannot be changed unless the actual ownership of the property changes, a spouse dies or the couple permanently separate/divorce.” This is the point that is referred to in the article.
If you are both jointly entitled to the whole of the property and income, you cannot ask for the income to be split unequally and therefore take advantage of tax at a lower rate. But where you own the property unequally or there is a deed or declaration entitling you to unequal shares of the income, then HMRC will change the way it taxes you.
Once HMRC accepts the beneficial entitlement, your tax treatment will change.
I don’t know if your property is in your sole name, or joint names, but if you are proposing to transfer the property outright to your wife, and this is drawn up properly, then this will count as a change of ownership and it will be possible for her to receive the rental income. Rosie Carr
Why is my dividend payment late?
“I hold the JO Hambro UK Equity Income Fund (GB00B95FCK64) through an Isa provided by Hargreaves Lansdown. I receive quarterly income from the fund. Over the past two years, the payment dates have crept back. May’s payment in 2014 was made on
28 May 2014, in 2015 it was made on 29 May and this year it was due on 31 May, but was not paid until 3 June. All my other funds due on 31 May have paid on time. Bank holidays are no excuse as it is the same every year. Have other readers noticed this too?" FT
JO Hambro told us: “We are sorry to hear of your reader’s frustrations over the late receipt of her fund dividend. The dividend was paid on time by our external fund administrator. However, a minor administrative issue experienced by our fund administrator, which affected just a handful of our fundholders, ultimately led to a slight delay in receipt of their dividends. We apologise for any inconvenience caused.”
With regard to the previous years’ payments JO Hambro said that on both occasions they had made the payment on time, or early if the pay date fell over a weekend or bank holiday.
Hargreaves Lansdown said: “It was unfortunate that in this case there was a short delay before the dividend [was paid] to the client’s account. While we had received the dividend, the necessary paperwork from JO Hambro was three days late, meaning we were unable to act as quickly as we would have liked. We apologise for any inconvenience this may have caused.”
Mark Polson, founder of independent platform research consultancy, the lang cat, says that, although relatively rare, late payments can occur if there is a discrepancy in data between platforms and fund managers. Emma Agyemang
