Key Post Best place to invest to "harvest" CGT losses forward?

This has been discussed before but I can't find the thread.

If an investor has big losses on a rental property or on shares, where should they invest so as to maximise the value of CGT losses forward?

Quoted shares which have a policy of not paying dividends so all their "income" is reflected in capital gains. For example, Microsoft; Berkshire Hathaway; Ryanair although Ryanair pays occasional dividends.

An investment trust which does not pay out the dividends.
But this is not as clearcut as we thought it was
Tax Treatment of ETFs and Investment Companies

Brendan,

I think the recent launch of the Green REIT plc may just have provided as much clarity as we will likely get (for the time being) on the appropriate taxation of investment trusts for Irish residents.

As I posted in the Green REIT thread a few weeks ago, capital gains on this real estate investment trust are to be taxed at the CGT rate (according to the prospectus). By inference, this should mean loss relief is available.

Hence, investment trusts in general should be a decent vehicle for using up previous unutilised tax losses while not exposing one to the vagaries of individual stocks. There are many investment trusts listed on LSE (London Stock Exchange) that don't pay a dividend or pay a miniscule one.

That said, I still like your suggestion of Berkshire Hathaway. It is a stock but given the number of investments it has it is, in reality, a fund, and one with the world's best money allocator running it. Not as cheap as it was a year or so ago but on a 3-5 year view it should be as good as any suggestion to try and utilise past losses.

Rory Gillen
Founder
GillenMarkets.com

Hi Rory

But isn't it a condition of the REIT that they must pay out all their income in dividends?

What I am looking for is a company which pays no dividends, so all its income is reflected in an increased share price.

Investment trusts which pay dividends are no different from shares which pay dividends for this purpose. But I believe that there are investment trusts which don't pay out any dividends.

Brendan

Brendan Burgess said:

Hi Rory

But isn't it a condition of the REIT that they must pay out all their income in dividends?

What I am looking for is a company which pays no dividends, so all its income is reflected in an increased share price.

Investment trusts which pay dividends are no different from shares which pay dividends for this purpose. But I believe that there are investment trusts which don't pay out any dividends.

Brendan

Click to expand...

Boss I think that Holy Grail might be an illusion. The key seems to be in getting the Revenue to recognise the investment as a share and not as a collective investment vehicle. It would seem that a key criterion for a share is that it would pay dividends. A vehicle which invests in shares and then reinvests its dividends would I think always qualify as a collective investment and be therefore subject to exit tax.

OK

So the best solution would be to buy a portfolio of shares which pay low or no dividends?

Brendan

Brendan,

The clearest solution is to buy shares with little or no dividends as the taxation issues are clear. It is my view that on the balance of probabilities investment trusts would be treated as shares if clarification were provided. As such, investment trusts should be suitable also until the Revenue says otherwise which they are unlikely to do retrospectively. In that regard, there are many investment trusts that pay no or minimal dividends. The advantage of an investment trust is that it is diversified. But then so is Berkshire Hathaway and Berkshire is clearly a stock and pays no dividend.

Elsewhere, the tax treatment of ETFs (exchange-traded funds) makes no sense. They pay dividends, mostly, and they are not gross roll-up vehicles in the same sense as 'actively' managed funds, as they are trackers. One of the fundamental attractions of 'funds' (of whatever type) is that investors can achieve diversification which lowers risk. Yet, for ETFs, loss relief has been disallowed.

Because the Revenue does not give loss relief to unit-linked funds (to reflect the fact that the Revenue gave life companies tax-efficient umbrella structures) the Revenue has gone on, incorrectly in my view, to ban loss relief on ETFs. Illogical and unfair! I would have thought the stockbroking community, which has considerable muscle, could have taken the issue up directly with the Revenue or through the courts.

Rory

Brendan Burgess said:

OK

So the best solution would be to buy a portfolio of shares which pay low or no dividends?

Brendan

Click to expand...

While in theory this might sound OK, it could result in a very volatile portfolio - non dividend paying companies tend to be either growth companies (small caps) or dogs and stuff one's portfolio full of them would not be a wise move.

Rory Gillen said:

I would have thought the stockbroking community, which has considerable muscle, could have taken the issue up directly with the Revenue or through the courts.

Click to expand...

The majority of the big European players have only go involved in ETFs in say the last two and a half years as up to then it was not see as a profitable product line and in fact they were only too happy to discover reasons why clients should not use such vehicles...... Now that we've got to the point that margins are being calculated in base points, suddenly these offers are beginning to be taken seriously.

Jim2007 said:

While in theory this might sound OK, it could result in a very volatile portfolio - non dividend paying companies tend to be either growth companies (small caps) or dogs and stuff one's portfolio full of them would not be a wise move.

Click to expand...

Hi Jim

Good point. I should have specified that I am not suggesting investing in such companies. But there are long-established profitable companies whose dividend strategy is not to pay any dividends.I mentioned

• Berkshire Hathaway
• Ryanair
• Microsoft

There are more on this list
[broken link removed]

I see we already had a Key Post on this topic!

Suitable investments for those with CGT losses to use up

As an update Brendan, I hear that tax experts point out that non-UCIT ETFs (i.e. the majority) are not subject to Irish Revenue rules and most likely should be treated as shares i.e. CGT applies and loss relief available.

And there are many ETFs that don't pay a dividend, or pay a very modest one.

Any further ideas on this?

I have been asked by someone who wants to invest the proceeds of the sale of their home for the long term. They have huge CGT losses forward from their bank shares.

Brendan

I presume there are a fair few US stocks of holding companies that would fit the bill. For example Markel Corp.

Brendan Burgess said:

Any further ideas on this?

I have been asked by someone who wants to invest the proceeds of the sale of their home for the long term. They have huge CGT losses forward from their bank shares.

Brendan

Click to expand...

UK investment trusts, US ETFs or direct equities should all be subject to "standard" tax treatment. So for diversification, the first two.

Hi guys I have only taken an active participation on discussing stock market investing in the last month. I will, when I finally pluck up the nerve, be a lump-sum investor. Having thoroughly reviewed all/most of the posts on askaboutmoney.com and on Gillen markets.com, I have formulated a strategy based on
maximising gain and minimising income ( for various different reasons ) which is the essence of what this thread is about.

Firstly Rory you mention there are many listed investment companies/trusts out there that do not pay a dividend or a minuscule one. I have spent a couple of weeks now looking for such companies to invest in and have even contacted the AIC and have found none.
This may be the reason why.....

The article below goes some way in explaining why I am having so much difficulty locating accumulating investment trusts.
U.S./Non EU ETFs MUST distribute dividends by law!! So to maximise capital gains and minimise income from dividends I have looked towards EU domiciled accumulating (UCITS) ETFs of which there are hundreds. Many of which are even denominated in Euros. Unfortunately the exit tax on these at 41% is greater than their EU ETF counterparts at 33%.
Here is some information about the websites that can locate them from my other posts....