Quick tax question

So, you get dividends from a UK company, you pay special low rate of income tax to cover fact that corporation tax has already been applied. Not quite, but the economic effect is such.

There’s a lovely complex system for with holding taxes on foreign dividends too.

OK, now, offshore fund, no corporation or with holding tax. Do you pay the lower UK income tax rates for dividends or do you pay full whack income tax?

18 thoughts on “Quick tax question”

  1. Generally treated as dividends, unless the fund mostly invests in debt-type investments (in which case it gets taxed at full income rates).

    As for when you get taxed – bit harder. If the fund sends annual returns to the UK authorities (Blairmore did – has that been picked up ANYWHERE in the press?) then you have to pay the tax as if the fund distributed its annual income. If the fund doesn’t, then you don’t, but you pay more tax when you sell your shares.

  2. If you are asking about UK tax laws in particular then I am in no way qualified to answer.

    If you are asking a general question about what capital gains rates should be then I would say if there is no corporate tax then the returns should be taxed at the same rate as wages. Since I’ve started reading this blog one thing I’ve realized is that we need to get rid of corporate tax completely and raise the capital gains rates to be on par with wage rates.

  3. The quick question doesn’t really have that quick an answer I’m afraid.

    The place to start is HMRC’S Savings and Investment Manual at SAIM 5010 (sorry if that reference is wrong, it’s how I seem to remember it). The headline rate is he same but UK dividends come with a tax credit, which Higher Rate taxpayers need to factor in.
    So the actual final tax on the company’s profit being distributed to you – which is what the tax planner needs to think about – depends on where in the world the company is and the rate of CT chargeable on its profits.

  4. “offshore fund, no corporation or with holding tax”: hang on, if it has invested in shares in various parts of abroad, it may have received dividends on which corporation tax and withholding tax have already been paid.

  5. Ironman:

    There is a special regime for offshore funds. They don’t fall within those general rules.

  6. “Liberal Yank
    April 10, 2016 at 2:29 pm

    and raise the capital gains rates to be on par with wage rates.”

    Why not lower wage rates to be on par with capital gain rates?

  7. Agammamon,

    As long as the budget is relatively balanced then that works too. If the numbers work out and I’m paying the same effective tax rate as the multi-millionaire presidential candidate I am happy. When I am pay twice the effective rate there is a huge problem.

  8. If you don’t tax companies, and they don’t pay dividends but accumulate value which can be realized by selling the shares, then I agree that the sales of shares should be treated as income and taxed accordingly.

    Maybe better to tax companies but impute the taxation paid as a credit to the person receiving the dividend and treat gains in capital value as tax free.

  9. If the company pays dividends, that are taxed at the same rate as wages, with no corporate tax, then there is no double taxation. What is the problem here exactly? The profits are all taxed when paid out.

    Question:
    Wouldn’t corporate tax also reduce the amount of money that could be paid as wages?

    If not, why not?

  10. “Liberal Yank
    April 11, 2016 at 12:27 am

    Agammamon,

    As long as the budget is relatively balanced then that works too. If the numbers work out and I’m paying the same effective tax rate as the multi-millionaire presidential candidate I am happy. When I am pay twice the effective rate there is a huge problem.”

    What does the budget have to do with whether or not that is a good idea? If its not balanced, more taxes on everyone will not fix that – all they’ll do is spend the money faster. If you want to balance the budget you have to cap spending. At the very least cap it where it is right now and let increasing wealth bring up tax revenues to match.

    And this just sounds like envy to me – the rich aren’t paying their fair share because the don’t pay the same ‘effective tax rate’ as you? And the solution is always to tighten the vice on the other guy and never to demand that it be loosened on you. In this case by employing an army (increasing the budget outlay) to ‘properly engineer’ the tax code to give ‘loopholes’ to only the right people with the enforcers and invasive prying to ensure that they pay up.

  11. Agammanon,

    Lowering my, and everyone else that isn’t well off, tax rate will massively increase the current deficit. I don’t suffer from the Laffer curve delusion that always lowering taxes will lead to more tax revenue. The reality is that economic returns follow a bell curve.

    We want to be on the lower end of the curve with regards to maximizing tax revenue. We will never get taxes rates exactly right so leaving a safety margin means we can be sure that higher taxes aren’t doing more harm than good. Preferably we have the tax rate low enough so that after an economic downturn there are options to fix any budget issues.

    And why does me wanted to be treated equally sound like envy to you? I fail to see how removing tax loopholes would expand the IRS army. If anything we would need fewer accountants with a simplified tax code. If I wanted to pay 14.1% while Romney paid 28.2% I could see the point but that’s no what I’m asking for*.

    *A flat tax with a standard deduction based on the poverty line is fine with me. We have to have the deduction or taxes push people into poverty. With the current welfare system this would become an even greater feedback loop leading to fewer people working and more on the dole.

    **I’ll reask my corporate tax question on a new thread. I’m sure I’m missing a second order effect that would cut the number of jobs but I don’t know what it is. From experience I don’t think anyone will come back to answer on this thread.

  12. LY

    “I don’t suffer from the Laffer curve delusion that always lowering taxes will lead to more tax revenue”

    The delusion is that you believe that that is what the Laffer theory claims.

    Laffer (who never claimed he invented the concept) merely says (broadly) that there is a tax rate above which and below which you will collect less tax.

    If you could find the napkin on which he is supposed to have sketched the idea for Reagan, you would indeed find a bell curve.

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