Are you an ‘accidental’ shareholder in one – or indeed a number of – companies? It could be a bank, Vodafone (formerly eircom – remember that?), Ryanair. Shares that somebody, somewhere recommended you buy into, or maybe the proceeds of inheritance.
Why being an accidental shareholder may not be worth the hassle
Is this you? You have some bank shares. You bought them ages ago. You can hardly remember why now. You’re aware they have lost value over the years, particularly since the banking crisis. Most of the time they are not even on your radar, but they are now, because you have just heard you will be paid a dividend.
“A dividend,” you think. “Well, that’s a novelty. I don’t remember the last time that happened.”
Now they are on your radar, but for the wrong reasons. Chances are they fall into the category of niggling irritations.
The Sunday Times reported last weekend that AIB will pay a dividend to shareholders for the first time in almost a decade. The problem is that three quarters of AIB’s shareholders (66,000 people) hold fewer than 10 shares. The bank will pay a dividend of less than €1 per share. AIB will charge up to 39c to process the dividend cheque. When AIB subtracts Dividend Withholding Tax at 20%, you’re left with a couple of cents per share.
So, if you hold 10 shares or fewer, the niggle is that they’re actually costing you money to hold on to.
Here’s another irritation. Now that they are on your mind, you are wondering what you should do with them. Is there any point in hanging on to them? Will they come back up again? How would you even go about selling them if you wanted to? God knows where the actual share certificates are!
Capital losses and capital gains
A second scenario is that you hold a lot of shares in this one entity, a bank, for argument’s sake. Let’s say you invested €200,000 in shares back when bank shares were considered a safe bet; before Anglo. Their value plummeted. They are now worth €10,000. OK, so that’s more than a niggle. That’s painful, but did you know that your capital loss of €190,000 can be offset against future capital gains tax (CGT)? At least that’s something, but if shares are so rarely on your radar, you may not be aware of that and it would be more than a niggle if you lost out because you didn’t know.
Dividend withholding tax and income tax
So how about if your shares were in a company that’s actually done well? Let’s say they have jumped in value and your €200,000 in shares are now, a year later, worth €300,000. Congratulations! But did you know you need to declare any dividend payments received on those shares as well?
“But I don’t do a tax return,” you say. “I’m not self employed.” Doesn’t matter; you are required to do a tax return on your dividends because it is liable to income tax as well as dividend withholding tax (DWT). That’s a niggle albeit one that you will happily put up with when the underlying companies are performing.
You also need to decide what to do with the income paid out in the form of dividends, and if you don’t have a financial strategy based on your objectives for the future version of your life, then even a decision you’re grateful to have to make can be a headache.
If it sounds like I am coming down heavy on shares, you’re picking up on my tone.
To be specific, I’m not keen on shares in just one company or a smattering of companies with no real plan behind them. Let me ask you: where, in your financial strategy do these shares fit? What part of your financial objectives are they meeting? What outcome do you expect them to produce?
You’re accidentally over-exposed
First things first – you are very exposed – maybe this happened by accident and it’s time to take corrective action. What happens if you have substantial investments in one company and it goes under? If you had invested the same amount of money in a globally diversified portfolio of shares, you would not be nearly as exposed to poor management decisions or the whims of the market. If one company fails, all the others continue to trade with the potential to increase their share value. Who has advised you up to this point, and what is their motivation?
Secondly, you find that the tail wags the dog. You have these shares therefore you have to do something about them. Your finances shouldn’t dictate how you live. How you live, and want to live in the future, should dictate your finances. Your objectives determine your outcomes.
It’s time to tidy things up. If you have a few shares here and there that every now and again niggle at you, but you really have no clue as to what to do with them, come and talk to me. I’ll help you make tax-efficient decisions about those shares.
But that’s the tip of the iceberg. More importantly, we’ll talk about your objectives so that we can start putting plans in place to achieve the outcomes you need. That way, random shares, windfalls, unexpected life events …none of these things will trip you up because you’ll be able to view them all in the context of your financial plan. No more niggles. No more conflicts.