Investments and tax

slopemaster

At the moment all our money is in various savings accounts, and (as OH also has a small income from self-employment) we are both getting close to the limit for income tax and want to not go over it.

Now we have £27 000 to go into savings / investments
We are non-taxpayers but will both be close to our limits this year, so need to place this money somewhere where the income is not liable to tax.


Plan is

• Put another £1500 in my cash ISA (I am over 50)
• Open a cash ISA for OH with £3600 (he is under 50 and doesn’t have one yet)
• Open two S & S ISAs with £5100 for me and £3600 for him (but no idea how to choose the funds its invested in. Thinking maybe a fund which invests in lowish risk corporate bonds?)
• Put £2880 for me, and £5000 for OH into our (L&G stakeholder) pensions this year)
  This leaves about £16 000 that I don’t know what to do with! The options would seem to be
• put in National Savings 3-yr term a/c, inflation+1%, tax-free (but inflation is low ATM – tho I s’pose it could rise within 3 yrs)
• put some in premium bonds – but likely poor return
• find an investment fund which will be liable to CGT, not income tax (but no idea how to go about choosing one) How to make best use of £10 000 each allowance for capital gains each year before CGT is payable???
• or, thinking of investments and capital gains, I could buy some artwork that I like with part of it! Would kind of like the excuse to do that, no idea whether it makes sense financially.

If anyones’s still reading I’d be very grateful for opinions or comments

Myrmidon_J

Just a quick thought - remember that if you choose to invest in equities, corporate bonds, etc., as well as (potential) capital gains, you may also have an income tax liability on dividends (10% / 32.5%) and distributions (20% / 40%).

Also: I think it extremely unlikely that in investing £16 - 22K, you will use anywhere near your combined CGT allowance for the year! (If you do, please tell me what you're investing in!)

slopemaster

Myrmidon_J wrote: »

Just a quick thought - remember that if you choose to invest in equities, corporate bonds, etc., as well as (potential) capital gains, you may also have an income tax liability on dividends (10% / 32.5%) and distributions (20% / 40%).

Thanks for the reply.
So what would that leave? Funds investing in property?
(Don't think I fancy that)
Oh dear my head hurts.

Myrmidon_J wrote: »

Also: I think it extremely unlikely that in investing £16 - 22K, you will use anywhere near your combined CGT allowance for the year! (If you do, please tell me what you're investing in!)

ah, yes, I didn't put that too well! 100% return would be pretty good.
But you know what I mean, at least START to use this allowance rather than paying income tax.

Myrmidon_J

slopemaster wrote:

So what would that leave? Funds investing in property?

Most property funds also distribute income, which is taxable.

'In this world nothing can be said to be certain, except death and taxes.'

But you know what I mean, at least START to use this allowance rather than paying income tax.

Yes, I know what you mean.

As I said, though, equities (for instance) and equity funds also pay dividends - which are taxable.

Some structured products are taxed against capital only, but (in my opinion) most of these are quite weak. They also tend to run for many years and are therefore unsuitable for a fair percentage of investors.

As you stated - some NS&I products are tax-free. You could consider these...

Myrmidon_J

Just wondering - roughly how close to the limits are you?

Obviously, next tax year, you'll be able to contribute significant sums to ISAs and thus avoid (almost) all taxation on your funds.

jamesd

Interest is taxable in the tax year in which it is received. You could use savings accounts that pay annually to defer interest income until next tax year. With the increased ISA use next year that deferral may be sufficient to keep you under the limit.

slopemaster

jamesd wrote: »

Interest is taxable in the tax year in which it is received. You could use savings accounts that pay annually to defer interest income until next tax year. With the increased ISA use next year that deferral may be sufficient to keep you under the limit.

OHH that's a point... off to do more calculating...

slopemaster

Myrmidon_J wrote: »

Most property funds also distribute income, which is taxable....

ah.

Myrmidon_J wrote: »

Some structured products are taxed against capital only, but (in my opinion) most of these are quite weak. They also tend to run for many years and are therefore unsuitable for a fair percentage of investors.
...

oh, thats VERY useful to know, thank you

slopemaster

"Absolute return funds ...are also tax-efficient, since the bulk of the return is subject to capital gains tax rather than income tax "
(From the Hargreaves Lansdowne site)
any thoughts on this idea?
If i understand it right, this is because the fund manager sells shares they don't yet own, betting on the price falling. So you would not expect to get dividents from these shares, is that it?

Aegis

It's tax efficient because generally absolute return funds generate growth rather than dividends. As such the gain is taxed against Capital Gains Tax, which is at 18% above the exempt amount. This exemption is on top of your income tax allowance, so your maximum tax bill tends towards 18% as the gains increase towards infinity (sorry, maths terminology!).

A savings account would tend towards 50% tax for similar (or lower) returns, hence the tax efficiency.

slopemaster

Myrmidon_J wrote: »

Just wondering - roughly how close to the limits are you?
Obviously, next tax year, you'll be able to contribute significant sums to ISAs and thus avoid (almost) all taxation on your funds.

Very, I think.
I will do OHs tax return, and anticipate him having a net income after expenses of about £6000. (This is all from self-employment; the savings are almost all in my name.)
I will have an income from interest of, as near as i can work it out, £6220 for 09-10, WITHOUT counting any interest from now on, on this extra money to be invested.
(Seems this will 'only' be £16 000 as we havnt put anything into pensions yet this year.)
So if that £16 000 just stayed in my agg a/c @ 2,85% it would earn....erm ...£190 - (good god, is that all?)
Thanks for getting me to work it out tho'!
so it might be OK after all, but trouble is I'm not sure of the exact figures...

(And i thought finding this stuff out would be useful also because the year after next i expect to go back to work and become a taxpayer again...)