ISA as an income help please

cheerfulcat

Hi, happyhero,

As for this, I have done well with the shares so I am not going to be silly enough to sell them all, to, as you say, deprive myself of future income stream. My intention would be to let the total stock value stay the same or go up if I am lucky and only take off the cream each time to live on.

Yes, but you will have fewer and fewer shares...then if we go into a bear market ( there's one well overdue ) you could be wiped out. Better to have a good cushion.

But where I am confused, is if I then said, I want to say for example my job is now a Trader and I want to take these profits as income as I have no other income. Would they allow this, could I then use the normal tax rules used for income, i.e personal allowance, then so much at about 10%, then 22%, then 40%. If not why not? If the tax man said no to this as income, it seems crazy I would have no obvious income yet still be possibly paying CGT.

It is nearly impossible to get HMRC to classify you as a trader and possibly not desirable either. I don't remember all the details now ( will look them up and post if you wish ) but IIRC it is not particularly advantageous...I have very little " normal " income but a fair amount of dividends and capital gains - doesn't seem to bother either the taxman or my accountant so I can't imagine it's that unusual a position. Remember that CGT is taken in exactly the same bands as income tax ( it's not all 40% ).

isasmurf

dunstonh wrote:

It can change from 2010 which is when they are up for review (review likely to take place the year before so we will know in advance).

The review is promised this year... 2009 it will be then. :rolleyes:

dunstonh

isasmurf wrote:

The review is promised this year... 2009 it will be then. :rolleyes:

In the last budget, GB extended the current allowances until 2010. This would have been the year for review but that is no longer required.

http://money.guardian.co.uk/Budget2005/story/0,15838,1439163,00.html

happyhero

Cheers EdInvestor, not quite by accident I have been trying for, what seems like for ever, it just that I suddenly got it right, maybe it was an accident. Time will show whether I can maintain this level from shares. I got made redundant at the end of 2005, and at the same time all my investments decided to look after me, or maybe somone up there did something, so that is why I am now considering this path.

Cheers cheerfulcat, thanks for that I do get your point, so the CGT would be taxed in the same way as income anyway, but obviously you don't get to take advantage of your personal allowance, .... good and bad I suppose. Out of interest why would I not want to class myself as a trader?

Am I better off playing the role of someone who has no trade but does not live off the state? I wondered about the pro's and con's of this regarding whether I show myself as having a job, or whether I show myself as nothing, i.e. any tax implication?

cheerfulcat

The taxman doesn't mind what you do as long as you pay any tax due. But for general purposes it's easiest to classify yourself as "self-employed", since that's the truth. If anyone asks what you do, just tell them you're a full-time private investor.

I will try to find the book which details the pros and cons of being classified as a trader - can't remember offhand. I *think* that one of the problems was that you sacrifice the annual CGT exemption.

cheerfulcat

OK, I've found the book. I'll just give a general outline, to avoid infringing copyright. Firstly, getting the taxman to accept you as a trader rather than an investor.

An investor invests for income; a trader invests for capital gain. To prove that you are a trader, you need to show the " badges of trade ". This includes

• investing being your only occupation
• reinvesting profits
• large amounts of capital invested ( best if > £100,000 )
• frequent trading
• borrowing to invest ( " gearing " )
• investing in growth companies ( no dividends )

Bear in mind that none of this guarantees that the taxman will accept that you are a trader! I think that of all of them, the " frequent trading " criterion would be the most important, followed by the amount invested. It is important to note that the usual presumption is that a person buys shares as investments; the onus is on you to prove that they are stock, which you intend to sell for a profit.

There are some real advantages in being classed as a trader, including the ability to offset expenses, the ability to utilise your personal allowance and the fact that your share profit will count as net relevant income for pension contribution purposes. The disadvantages are

• You have to pay Class 2 and Class 4 NI contributions
• You lose CGT relief ( both the annual allowance and taper relief )

The position is summed up thus -

• If your profits are less than the CGT exemption you're better off classed as an investor
• If you make significant profits ( over £100,000 ) you might be better off as a trader but only if you have very high expenses to offset
• If your profits are less than £50,000 you're unlikely to benefit from trader status

This is the book I'm using. Despite the glowing recommendations it isn't the easiest read and almost certainly not worth the price ( £23 for a paperback!!! ) but worth reading all the same so you might like to get your local library to order a copy

happyhero

Ok, thanks you very much for going to all the trouble of finding the book and the info, I really appreciate that. I think I will have to get that book because it seems very relevant to my situation and thoughts at the moment.

I think Investor is the way to go for me, for now, but I will look into what you have said and read that book, to see how I go in the future depending what happens.

Once again many thanks for all that.

cheerfulcat

No probs, hh, glad to be of use. Do check out the Motley Fool, where there are many very bright and experienced investors - plenty of good info to be had. Best of luck with your ventures!