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In my view, investing in a Stocks and Shares ISA is one of the best things UK investors can do. Whether it’s for building wealth or earning passive income, protection from taxes on capital gains and dividends is a big help.
Both of these are set to increase in future. So it’s never been more important for investors to use their annual £20,000 contribution limit to make sure they can hang on to their gains.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Dividend tax
Buying shares in companies that distribute their earnings as dividends can be a great way of earning passive income. This allows investors to do nothing as they receive their share of the profits.
UK citizens who don’t hold their investments in something like a Stocks and Shares ISA are exempt from taxes on the first £2,000 in dividends they earn. But that is set to fall to £1,000 in April.
Any dividends that are eligible for tax are treated as ordinary income and taxed at up to 39.35%, depending on the investor’s tax band. That’s something I’d rather avoid.
As a result, I look to hold my dividends in a Stocks and Shares ISA. That way, I get to keep the passive income I generate without having to pay tax on it.
Passive income
Right now, I think there are high-quality dividend stocks that still have yields of up to 7.5%. And at that rate, a £10,000 investment can compound quickly.
Investing £10,000 today and receiving a 7.5% dividend would earn me £750 in the next year. That’s not an issue by itself, but reinvesting that income at the same rate could cause it to grow fast.
If I kept investing my dividends at 7.5%, then my returns could reach £1,000 in year five, £1,480 in year 10, and £3,000 in year 20. That’s a 30% annual return on my initial investment.
By this point, though, the value of my investment would have reached £40,000 – twice the current ISA contribution limit. That’s why it’s important to start investing in a Stocks and Shares ISA today.
Targeting a 7.5% return
So the big question is what stocks should I buy to achieve that 7.5% return? I think there are a few choices available, but the opportunities that stand out to me are in the real estate sector.
Warehouse REIT is a good example of the kind of thing I have in mind. It’s a real estate investment trust (REIT) that makes money by leasing industrial distribution centres.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice.
The sector is quite crowded at the moment, which is a risk going forward. But the business is a specialist in the industry, which I think gives it an advantage over other competitors.
At today’s prices, the dividend yield is 7.65%. So this is where I’d look to start my investing journey.
Diversifying
Ultimately, my plan would be to build a diversified portfolio of stocks in my Stocks and Shares ISA. This might include other REITs but also businesses in other areas.
Doing this should help limit the risk of something going wrong with any one company. But I’d look to do this over time, investing in different businesses when the opportunities present themselves.