THE FINANCIAL WELLNESS COACH
Investment options as the owner of company shares – to sell, or not to sell?
Question: I own a large number of shares in a company that I worked for before I retired. I'm considering selling them, as I could double the income that I currently get from the dividends by investing in the bank. Would you recommend this?
Answer: It is difficult to give you a categorical answer without understanding your full financial situation. I will, however, go through a few factors that you should consider when making this kind of decision.
The dividends that you get on a share are not the only issue you should be considering. You will also be getting some capital appreciation on the share price. With the bank deposit, you’ll just get your capital back once the interest has been paid.
You must consider the timeframe of any investment, as well as the prevailing interest and inflation rates over the short and long term.
Seen in isolation, an interest rate of, say, 7.5% is great. However, when seen against the backdrop of an inflation rate of 7%, you will only be getting a return of inflation plus 0.5%. While this is great for a short-term investment, it is not ideal for a longer-term investment. I like to use this model:
By having R2-million invested in just one share, you are running a concentration risk. If things go badly at that one company, your capital growth and dividend income will be affected.
You can reduce this risk by investing in a portfolio that has assets in a range of different asset classes such as equities, cash and property. This should allow for more stable investment growth.
Tax on the income
The tax that you pay on dividends is 20%, while the tax you’ll pay on any interest income will be at your marginal rate once the annual tax allowance on interest has been breached.
If your income came from drawings from your portfolio, the only tax you’d be paying would be capital gains tax (CGT). This is 40% of your marginal tax.
Even if your marginal tax rate is at the highest level of 45%, the CGT will only be 18%, which is still lower than the dividend tax of 20%.
Capital gains tax
When you sell your shares, it will trigger CGT. As we are talking about a large portfolio, this amount could be high. I would recommend that you apply some thought to the selling process to ensure that you do not pay more tax than you need to.
CGT is calculated as follows: gain on the sale of the asset (less the annual R40,000 exclusion) x 40% x your marginal tax rate.
If you spread the sale of the asset over a couple of years, you can take advantage of the annual exclusion where CGT only kicks in after you have had more than a R40,000 gain in that year.
The other option that you can use to reduce CGT is to reduce your marginal tax rate. This can be done by ensuring that you have invested the full 27.5% allowance into retirement savings.
As you can see, there are a number of moving parts to this question, and I would recommend that you chat with a competent financial planner who can help you make the correct decision. BM
Kenny Meiring is an independent financial adviser. Contact him on 082 856 0348 or at financialwellnesscoach.co.za. Send your questions to [email protected].