As this week’s financial planning feature shows, a one percentage point increase in the overall cost of investing in a global equity tracker over the past two decades would cost you 18 per cent in overall performance. This is almost as much as the 20 per cent top rate of capital gains tax (CGT) charged on profits realised over the current annual allowance of £12,300.
If fees are one of the biggest predictors of your returns, tax management is one of the most powerful tools you have to manage how much your investments are worth when you crystallise them. I’m sure you know that if you put your money into an individual savings account (Isa) it can grow tax free. But money outside tax wrappers could be subject to dividend tax, income tax and CGT, which are charged at different rates.
How much could this cost in the long run? Let’s say you have a £100,000 portfolio with a 4 per cent annual yield, which is taken as income and paid in dividends, with 1 per cent capital growth each year after charges. Laith Khalaf, head of investment analysis at AJ Bell, calculates that over 20 years this would deliver £88,076 in income. And if the portfolio is not held in a tax-efficient wrapper, a higher rate taxpayer would pay £16,226 in tax and an additional rate taxpayer £18,918. It’s a big expense, despite being able to receive dividends worth £2,000 each year tax free.