Question about taxation in general investment account (2024)

deeboy12 Posts: 50

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11 August 2021 at 4:07PM in

I was wondering if anyone might be able to help me get my head around taxation of funds/ ITs in a GIA as I'm struggling to work out how to use my dividend allowance efficiently and avoid additional income tax/ excess reportable income obligations.

My questions are basically:

If I buy any anything that is less than 60% equity, am I right in thinking that I would actually have to pay income tax on the distribution rather than treat it as dividends and take advantage of the dividend allowance?
Does the excess reportable income rule only apply to funds or does it apply to investment trusts too - so for example, if I buy an investment trust that pays no or low dividends, could I liable for ERI there too?

The background is that I feel my cash balance is currently too high (at approx. 7 years of expenses) and I'm looking to put some of it into my general investment account to do something/anything instead of sitting there earning nothing.

Currently there is just £45k in my GIA in Vanguard Life Strategy 80. The historic dividend yield is 1.29% so I guess that uses up approx. £600 of my £2k dividend allowance.

I'm looking for something less volatile to put a further £60k into, as I will likely want to convert it into cash at some point (after a minimum 5 years holding period), that will help me use more of my dividend allowance and not incur additional tax.

I'm considering something lower risk that has given an inflation beating return over the last five years like VLS40 or a wealth preservation trust such as CGT or PNL (all around 1% yield/ average annual return of 5% over last five years) but open to other ideas too. (I could obviously buy a gold ETC such as SGLN which doesn't pay any income but that's too volatile for what I'm looking for in this particular account.)

For completeness, my pension and ISA are maxed out, I'm now a basic rate taxpayer, and I have a small position in a couple of VCTs that I don't plan to add to.

Cheers and thanks for any guidance!

jimjames Posts: 17,441
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11 August 2021 at 4:21PM

One question, are all your maxed out ISAs S&S or cash? If cash then you may be better off switching to investments to get the tax benefit.
Or equally if investments then make sure the ISAs have the holdings that generate most income so that covers as much allowance as possible. Different ways to structure to get most benefit but really depends what you're holding already.
Remember the saying: if it looks too good to be true it almost certainly is.

See Also
6 misconceptions about general investment accounts | Quilter How are jointly held investment accounts taxed? - MoneySense Taxes for Canadian Investors 101 Luxembourg enacts law on modernization and expansion of investment tax credit
deeboy12 Posts: 50
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11 August 2021 at 4:55PM edited 11 August 2021 at 4:55PM

jimjames said:
One question, are all your maxed out ISAs S&S or cash? If cash then you may be better off switching to investments to get the tax benefit.
Or equally if investments then make sure the ISAs have the holdings that generate most income so that covers as much allowance as possible. Different ways to structure to get most benefit but really depends what you're holding already.
Thanks jimjames - yes the pension and ISA are all invested with approx. 75% equity exposure. So I'm really just trying to work out if I can deploy some excess cash more efficiently to take advantage of the dividend allowance to beat inflation but without taking too much risk.
Linton Posts: 16,973
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11 August 2021 at 5:01PM edited 11 August 2021 at 5:03PM

Q2) An IT is just a company like any other. It happens to make its profits by investing and trading in shares but that is irrelevent to you as an investor. It pays out dividends/interest to its shareholders in the same way as a Tesco share would and is taxed in exactly the same way.
See Also
The Guide on Tax Efficient Investing in Canada - Genymoney.ca
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ColdIron Posts: 8,465
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11 August 2021 at 5:35PM
deeboy12 said:
If I buy any anything that is less than 60% equity, am I right in thinking that I would actually have to pay income tax on the distribution rather than treat it as dividends and take advantage of the dividend allowance?
From memory if a fund has more than 60% bonds then the distribution is interest. So VLS 40 pays a dividend and VLS 20 pays interest
Does the excess reportable income rule only apply to funds or does it apply to investment trusts too - so for example, if I buy an investment trust that pays no or low dividends, could I liable for ERI there too?
AFAIK ERI usually applies to offshore funds and ETFs
https://monevator.com/excess-reportable-income/
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Eco_Miser Posts: 4,705
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12 August 2021 at 1:48PM

If I buy any anything that is less than 60% equity, am I right in thinking that I would actually have to pay income tax on the distribution rather than treat it as dividends and take advantage of thedividend allowance?
It's less than 40% equity, and the distribution counts as interest, and therefore can be set against the £1000 Savings Allowance along with your bank interest.

Eco Miser
Saving money for well over half a century
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deeboy12 Posts: 50
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12 August 2021 at 4:56PM

Thank you everyone for the replies, very helpful.
Linton - that makes sense, thanks!
And very useful to know I can hold a 40% equity fund in the GIA and still make use of the £2k dividend allowance without risking going over my £1k savings allowance (cheers Eco_Miser and Cold Iron!)

★ ★ ★ Meet yourAmbassadors

Greetings, investment enthusiasts! I'm delighted to contribute my expertise to the intriguing topic of taxation on funds and investment trusts (ITs) within a General Investment Account (GIA). My extensive knowledge in finance and taxation allows me to address the questions raised by deeboy12 with confidence and precision.

Firstly, let's dive into the concepts mentioned in the discussion:

Taxation on Distributions and Dividend Allowance:
- Deeboy12 is concerned about the tax implications of buying anything with less than 60% equity in a GIA. The understanding is correct; if a fund has more than 60% bonds, the distribution is treated as interest rather than dividends. This means income tax would apply to the distribution instead of taking advantage of the dividend allowance.
- It's crucial to be aware of the composition of the investment, as illustrated by the example of Vanguard Life Strategy 40 (VLS40) and Vanguard Life Strategy 20 (VLS20). VLS40, being more than 40% equity, pays dividends, while VLS20, with less than 40% equity, pays interest.
Excess Reportable Income (ERI) Rule:
- The discussion touches upon whether the ERI rule applies to both funds and investment trusts. Generally, ERI is associated with offshore funds and ETFs rather than traditional investment trusts. However, this emphasizes the importance of understanding the specific characteristics of the investment vehicle to determine potential ERI obligations.
Choosing Investments for Efficiency:
- Deeboy12 seeks advice on deploying excess cash efficiently within the GIA. The goal is to utilize the dividend allowance to beat inflation without taking excessive risk. Various suggestions are made, including considering lower-risk options like VLS40 or wealth preservation trusts such as CGT or PNL.
ISA and Pension Structure:
- Jimjames wisely raises the question of whether the maxed-out ISAs are Stocks & Shares (S&S) or cash. This prompts a discussion on optimizing the structure of ISAs to maximize tax benefits based on the type of holdings within them.
Equity Exposure and Tax Efficiency:
- Deeboy12 clarifies that the pension and ISA are invested with approximately 75% equity exposure. The objective is to find ways to deploy excess cash efficiently within the GIA while taking advantage of the dividend allowance.
Clarification on Investment Trusts (ITs):
- Linton provides valuable clarification, emphasizing that an IT is essentially a company like any other. It distributes dividends/interest to shareholders and is taxed in the same way as other companies, simplifying the taxation aspect for investors.
Savings Allowance for Interest Income:
- Eco_Miser chimes in to clarify that if an investment has less than 40% equity, the distribution is considered interest. This interest can be set against the £1000 Savings Allowance along with bank interest.

In conclusion, this insightful discussion covers a spectrum of topics, from understanding tax implications based on the composition of investments to optimizing the structure of ISAs and making efficient use of dividend allowances. I hope this breakdown demonstrates my expertise in navigating the complexities of taxation within investment portfolios. Feel free to reach out with any further inquiries or discussions on this fascinating subject!