I get a very different result when I run these numbers. I’m not from the UK so I may be interpreting the tax rules incorrectly, but here’s the logic chain I used to model it (year one, so that it can be duplicated and logic verified);
If I invest 100,000 and pay the .5% stamp, I actually invest 99502.49
Dividends for the year would be 1990.05, of which I lose 746.27 to tax, leaving 1243.78 for reinvestment
Expected capital gains would be 4975.12 (99502.49 * 0.05)
Reinvesting the dividends of 1243.78 loses 0.5%, leaving 1237.56
Expected value at end of year 1 is 105715.2 (99502.49 + 4975.12 + 1237.56)
At the end of year ten, I expect 182334.10 in my account, which I then sell/crystallize.
The amount of tax I would pay is based on the “adjusted cost base” (google couldn’t answer what term is used in the UK, but basically the amount paid for the shares). I work this out to be 118275.5, essentially buying the dividend-reinvested shares at the expected 5% growth rate during the 10 years. I then subtract the total stamp taxes paid, which I work out to be 580.43. This gives me a tax burden of 182334.10 − 118275.5 − 580.43 = 63478.17. I then deduct the 11,000 capital gains allowance. This results in a tax payment of 52478.17*0.28 = 14693.89.
Final net value of the sale is therefore 182334.10-14693.89 = 167640.21
In real terms, this is 134996.70, or a real rate of return of 3.2%
I believe the major difference in our numbers comes from the tax rate on gains.
In terms of sensitivity, I get a return of 4.84% with zero taxes (dividend and capital gains), whereas an increase to 9% (each div and cap rates at +1%) expected return gives 4.2%. This is under the assumption of the worst possible tax rates and scenarios (full sale at maximum rates). There are lots of timing methods to reduce the tax impact.
Granted, this is based on my knowledge of Canadian taxes, but I verified the UK equivalents as best I could and the differences are primarily in the stamp taxes. Most of the data is from https://www.gov.uk/tax-sell-shares/work-out-your-gain (and the related links).
I get a very different result when I run these numbers. I’m not from the UK so I may be interpreting the tax rules incorrectly, but here’s the logic chain I used to model it (year one, so that it can be duplicated and logic verified);
If I invest 100,000 and pay the .5% stamp, I actually invest 99502.49
Dividends for the year would be 1990.05, of which I lose 746.27 to tax, leaving 1243.78 for reinvestment
Expected capital gains would be 4975.12 (99502.49 * 0.05)
Reinvesting the dividends of 1243.78 loses 0.5%, leaving 1237.56
Expected value at end of year 1 is 105715.2 (99502.49 + 4975.12 + 1237.56)
At the end of year ten, I expect 182334.10 in my account, which I then sell/crystallize.
The amount of tax I would pay is based on the “adjusted cost base” (google couldn’t answer what term is used in the UK, but basically the amount paid for the shares). I work this out to be 118275.5, essentially buying the dividend-reinvested shares at the expected 5% growth rate during the 10 years. I then subtract the total stamp taxes paid, which I work out to be 580.43. This gives me a tax burden of 182334.10 − 118275.5 − 580.43 = 63478.17. I then deduct the 11,000 capital gains allowance. This results in a tax payment of 52478.17*0.28 = 14693.89.
Final net value of the sale is therefore 182334.10-14693.89 = 167640.21
In real terms, this is 134996.70, or a real rate of return of 3.2%
I believe the major difference in our numbers comes from the tax rate on gains.
In terms of sensitivity, I get a return of 4.84% with zero taxes (dividend and capital gains), whereas an increase to 9% (each div and cap rates at +1%) expected return gives 4.2%. This is under the assumption of the worst possible tax rates and scenarios (full sale at maximum rates). There are lots of timing methods to reduce the tax impact.
Granted, this is based on my knowledge of Canadian taxes, but I verified the UK equivalents as best I could and the differences are primarily in the stamp taxes. Most of the data is from https://www.gov.uk/tax-sell-shares/work-out-your-gain (and the related links).
It is very possible made a mistake in my spreadsheet. The numbers were intended for illustration only. Thanks for the correction.
You make a good point regarding timing taking gains. This is another way that thinking about tax can be very important.