How to split a £1,000 a month investment between an ISA and a fund account

TWM_2

Hello.

I'd like to invest £1,000 a month in a range of equity and bond funds.

As this is in excess of the £600 a month I can put in an ISA, what's the recommended way of splitting this?

Is it better to put £1,000 into an ISA for seven months, then put the next five months' contributions into a fund account? Or should I put £600 in the ISA each month and £400 in the fund account?

Also is there a hierarchy that makes best use of the ISA's tax advantages? Bonds in the ISA first then equities?

Thanks, TWM.

Lokolo

Are you planning on keeping these investments for 10 years and keep the contribution going for 10 years?

TWM_2

Yes, Lokolo; the plan is to keep the contributions going for around ten years and to hang on to the investments for that length of time too.

Thanks, TWM.

Lokolo

Well it doesn't matter how you do it then.

As soon as you stop putting more money in, you can transfer existing investments into an ISA without added costs (such as CGT). So 10 years are up, you stop. You transfer £7,200 worth into an ISA. And continue to do so. Then after 10 years alll investments will be in ISA.

You can buy and sell shares, the same amount, within 30 days of each other and not have to pay CGT. This is called Bed and Breakfasting (http://www.hmrc.gov.uk/cgt/intro/glossary.htm). Putting existing shares into an ISA is called Bed and ISA. Google is king.

Only costs are over the first 10 years, any dividends will have higher costs if you are a higher rate tax payer.

But all of this is assuming ISAs are still running in the next 20 years.

Also allowance is going up in April

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Might want someone to confirm all of this before though

Aegis

Might be simplest to invest £600 a month in the ISA and the rest outside. That way you don't need to adjust it at 7 month, 12 month, 19 month, etc.

Lokolo

Aegis wrote: »

Might be simplest to invest £600 a month in the ISA and the rest outside. That way you don't need to adjust it at 7 month, 12 month, 19 month, etc.

Am I right in what I am saying, that you don't pay CGT with the Bed and Breakfasting rule and you can use this for Bed and ISA? I'm not sure thats all (if you don't know then I'll wait for Dunston but he hasn't been active in last few days! Most probably crying over Norwich getting relegated or Chelsea not winning and trophys)

CLAPTON

Bed and breakfast is essential dead now... it used to be useful for people who hadn't used their CGT allowance for the year to 'realise' their capital gains (up the the un-used portion of their CGT allowance ) by selling their shares and buying them back next day (hence bed and breakfast (dealers would do this cheaply).. this would effectively give the shares a new base price for future CGT purposes.

This was stopped a few years back and now it won't work unless there is 30 days between selling and rebuying.
There is, however, nothing to stop you selling shares and buying them again in an ISA assuming you haven't already used your ISA allowance.. so people talk about bed and ISA, but it of limited use as the maximum you can buy is the ISA allowance whereas with B&B the maximum was your capital gain rather than the value of the shares.

Lokolo

So I am assuming if you to Bed and ISA you will have to pay CGT from when you sell to then put in an ISA?

CLAPTON

Lokolo wrote: »

So I am assuming if you to Bed and ISA you will have to pay CGT from when you sell to then put in an ISA?

Yes but the point of the exercise was to use your un-used CGT allowance so you only sell sufficient to just realise your un-used allowance for the year.
It was used by people who were inactive traders but were steadily building up a substantial portfolio for (say) retirement and wanted to reduce theeir eventual CGT bill if they needed to cash in the shares in the future.

EdInvestor

TWM wrote: »

Also is there a hierarchy that makes best use of the ISA's tax advantages? Bonds in the ISA first then equities?

Yes.If you are a basic rate taxpayer you won't pay any tax on your equity divis as it's covered by the tax credit, and you have an annual CGT allowance of over 10k.Whereas bond income will be taxed @20% outside the ISA.

dunstonh

Put the higher yield and/or higher potential investments within the ISA. Fixed interest funds get the tax back in an ISA. The higher potential funds are more likely to suffer capital gains. Although if you switch funds (say through rebalancing) each year, you can use your personal CGT allowance to keep you under the limit. Also, in years of losses on some you can switch funds and offset the losses against gains on others.

A fund switch is a chargeable event for CGT for non-ISAs.

Also, if you cease the regular contribution later, you can "bed & ISA" by moving the unwrapped funds into the ISA.