Advice on moving from unwrapped to S and S isa

A question about : Advice on moving from unwrapped to S and S isa

I have a small investment portfolio I only started up in January 2015 and am investing Ј1000 per month into until March. I had already used up my isa allowance for 2014-2015 in a fixed term cash isa so could not open a stocks and shares isa at that point.

There should be Ј3000 in by the end of March and then I shall be opening a S and S ISA after 5 April for 2015-2016 and continue to invest Ј1000 per month in that. My question is should I bed and isa the unwrapped Ј3k investment and put it into my 2015-2016 isa or is it not worth it for such a small investment and should I just leave it to sit unwrapped?

There will be charges which will be offset by being able to receive the fixed term securities interest tax free and obviously it keeps it all simpler but I am having difficulty understanding the charges of doing a BED and ISA. Does anyone have any experience of this?

Best answers:

• Are you holding the investments through a platform? If so, which?
  How many funds do you have?
• I am using Cavendish online as the platform and I only have the one fund - just the Vanguard Life Strategy 60.
• I don't think there is a charge trade OEICs at Cavendish, so the only charge you'll implicitly pay is the dilution levy when you repurchase inside the ISA.
  But Vanguard LS 60 distributes all of its income as dividends not interest, doesn't it? If so, there'll be no tax advantage to wrapping up the income within an ISA if you are a basic rate taxpayer.
• If you are using Ј1,000 pcm and have Ј3,000 free, just put it into the ISA anyway. It's a complete no brainer with no real downside to you. You only have 1 account not 2, you may become a higher rate tax payer, you will never have to worry about capital gains, you won't have to record and retain transaction records, you gain protection from future legislation etc etc
• Just to clarify (as I wasn't 100% certain)...
  https://www.vanguard.co.uk/uk/mvc/loadPDF?docId=2077 (page 44)
  Quote:
• Thanks for the replies and I was not aware that the VLS 60 pays out dividends only. I was under the mistaken impression that on the 40% bond/fixed term element of the mixed asset fund there would be interest payments so thanks for clarification. It does look as if Cavendish don't make a charge for transferring from unwrapped to wrapped so as you say it is only the dilution levy. I think I will probably transfer it into the new isa at some point in the 2015-2016 tax year if only to keep things simple but will have a think about that.
• You are right that generally a mixed fund will usually call its distributions 'interest' if over 60% of its assets during the period were interest paying sources.
  Assuming you're in an ISA:
  If you are in a VLS 20 (or, a fictional "VLS 0", if they had one of those) then the payment you're getting is interest and as standard, some of it is taken away from you for 20% withholding tax at source unless/until your ISA/SIPP manager can get it paid gross or go back and claim it. Then it gets reclaimed and you have not actually suffered any cost.
  If you are in a VLS 80 then the payment you're getting is dividend and none of it is taken away from you so there is no need for your ISA/SIPP manager to claim a refund, and you have not actually suffered any cost.
  In both cases you pay zero tax and you end up with the full cash distribution that the fund declares.
  What would happen if you tried to 'split up' your Ј100 of VLS 80 into Ј80 of VLS 100 and Ј20 of "VLS 0" ?
  Well, the VLS 100 would pay you a dividend that would not be taxed because it's in an ISA so you pay zero tax on that bit.
  Then the VLS 0 would pay you an interest payment that would be withheld upon and then recovered so you pay zero tax on that bit.
  Net result, you pay zero tax and receive the full cash distribution that the fund declares.
  So, there does not seem to be much to be gained really. In fact, arguably the combination of VLS 0 and VLS 100 is worse than VLS 80 because by using something that has interest tax withheld at source and then needing to be reclaimed, a small delay may be introduced on some platforms.
  There is perhaps a separate point on the efficiency of the Fund itself.
  - If it is a straight bond fund (VLS 0) then it will have a lot of interest income and then some operating costs and then the leftover money is classed as interest expense when it pays out to all the owners. The taxable interest income will be offset by the operating costs and interest expense resulting in no corporation tax bill for the fund. The only payment to the taxman is what has been withheld at source on the distributions on behalf of investors, which we in ISAs or SIPPs will reclaim our share and not worry about.
  - If it is a straight equity fund (VLS 100), then it will have a lot of dividend income and then some operating costs and then the leftover money is classed as dividend (rather than an expense) when it pays out to all the owners. However, its dividend income is not taxable so it doesn't matter that it doesn't have enough 'expenses' to offset the income ; there will be no tax bill for the fund.
  The middle ground of a VLS 60 or would seem more complex. Like the VLS 100 it gets some dividend income which is not taxable. But like the VLS 0 it gets some interest income which presumably IS taxable. And its distributions to investors are not an interest expense so will not offset any taxable income it has. Therefore on the face of it, if the operating expenses (management fee) are not as much as the taxable income, then it will have a corporation tax bill, meaning the money available for distribution to investors in this blended fund is not as much as it would have been if all the assets had been held in a VLS 0 where the income was covered by interest expense and a VLS 100 where the income was non-taxable dividends.
  This therefore points to a potential inefficiency in a blended fund that does not stream its income into interest and dividend swim-lanes and give everyone a specific statement of how much interest and how much div they have received. There could be a layer of tax paid by the fund itself? That seems to be the case from a cursory glance at the VLS financial statements for VLS 60 vs VLS 100 although the corporation tax amounts mentioned are not massive.
  However, I may have jumped to the wrong conclusion there. I don't claim to be a tax expert and don't really hold mixed investment fund of funds myself - I prefer individual specialist funds and the only VLS I've had is the 100 version. I am just a layman jumping to a conclusion.
  Perhaps the tax paid in some funds and not others relates to some other international irrecoverable withholding tax that the fund suffered, which is being reported differently in different types of fund? We are after all looking at a fettered fund-of-funds vs a direct investing fund so you would have to look at multiple sets of accounts to try and figure your personal exposure to everything. Most people do not look at underlying costs or expense types within the fund and simply concentrate on whether the return after charges is decent and whether the OCF is affordable. Then they also know how any divs or interest that they personally receive is taxed, so anything else is a step further than they need to go.