Tax Efficient Options

zagfles

What about:

Take £50k pa as UFPLS. Put £3600 gross back into OP's pension and £3600 into spouse's (ie £7200 gross total, £5760 net).

£12500 of the UFPLS tax free, next £10k tax free (personal allowance), tax relief on pension payments effectively means next £7200 tax free, so tax only paid on £20k, so about £4k tax pa. Net money out £38740pa.

Though not sure if this would be caught by the recycling rules? It seems not as the contributions of £3600 are less than 30% of the £12500 tax free element of the UFPLS? Don't think recycling into someone else's pension (spouse) applies does it?

atush

jim8888 wrote: »

Thanks for the responses so far. In answer to some questions I do have a spouse and she will retire at the same time as me but will be unable to take her pensions at that age. She will get her pensions at 65 and I have another one that kicks in then too, hence I'm planning to spend the first one.

Ok, so with a spouse you can use 30K per annum S&S isa allowances with your first 125K, that is if like me you would not want most of your money in VCTs due to the risk lol.

A brilliant weez, but too rich for my blood :eek:

jamesd

jim8888 wrote: »

Thanks for the responses so far. In answer to some questions I do have a spouse and she will retire at the same time as me but will be unable to take her pensions at that age. She will get her pensions at 65 and I have another one that kicks in then too, hence I'm planning to spend the first one.

I see from your other posts that you also appear to have money to live on for the next four years from another source. That's useful because if you were able to start on the VCT use sooner it would decrease the VCT percentage of total investments. Not sure that you have sufficient to handle the deferring implicit in VCT use for the initial four years, though. You might not have enough to do deferring at all during that time because you might need all of your savings to live.

What is your other pension? Is it another defined contribution or personal pension? What sort of initial pot size is it? Again it's of interest in part because it'll reduce the VCT percentage, making that a more balanced part of the overall mixture of investments.

Zagfiles, the total of the 3600 contributions would be less than 30% of the tax free lump sum so the lump sum recycling rule cannot be triggered. You're right, no recycling limit on contributions to the pension of another person. If the spouse is of a suitable age and not a higher rate tax payer a possible refinement is to use some of the lump sum for contributions to a personal pension for her, then have her draw the lump sum from that. The extra tax relief will again reduce the VCT percentage.

Thrugelmir

Triumph13 wrote: »

Hmm. Very clever, but looks like a prime example of letting the tail (tax) wag the dog!

One only has to look at the management fees on VCT's to see who the real winners are.

paulypost

I’m a big fan of VCT’s having originally been sort of forced to buy my first £100k worth to avoid £30k tax on a severance payment in 2008 when I retired early. Since then I have saved tax on my pension each year with much smaller VCT investments. Dividends over the period of £66k have also been a pleasantly surprising tax-free return.
My question/concern is whether I will be able to sell them if I need to and whether I should go on investing small amounts each year for tax saving purposes. With good returns so far I am not particularly inclined to sell yet. However, with currently about 20% in VCT’s I am way over jamesd’s 10% advised level. My IFA is naturally cautious!
All thoughts greatly appreciated.

jamesd

It's down to personal comfort levels. I'd be comfortable with 20-30% personally but it's appropriate for me to mention a more commonly accepted level for those of more typical risk tolerances.

You're fine at 20% as long as you're comfortable. By now you have the advantage that most of your initial VCT investments will have increased in value to the point where selling would be possible if desired, without a capital loss. There's really no need to change if you don't want to change and the VCTs you have are delivering as desired. However, given that you can sell, I suggest at least trying not to get to say 25% VCT investments. Which implies some light selling as you invest in new ones to eliminate your ongoing income tax level. You might, say, adopt a gradual selling plan with the objective of getting down to 10% over 15 years.

chucknorris

Triumph13 wrote: »

Hmm. Very clever, but looks like a prime example of letting the tail (tax) wag the dog!

That was my thought too, I recently looked into VCT's and realised that they are not for me, the only thing that was attracting me was the tax relief, and on reflection I decided that wasn't a good enough reason for me to invest. It doesn't mean of course that they are not good for others, but they are not for me.

enator

If you are concerned about being tied in to what you perceive as a potentially illiquid investment, look at the limited life VCT's (e.g. Downing, Pembroke, Puma etc) - these are arranged to be dissolved in year 6 and all proceeds returned to the investors.

Also if you want to sell after the five year period, the VCT managers will buy back your shares at NAV minus anything between 0% and 10%. Reading the Annual Reports I get shows that all of the ones I've invested in have purchased shares over the past year. Of course, things may change and they could refuse but that's part of the risk you accept with VCT's.

I'm very happy with the way my VCT investment is going (now in the 6th year), I'm currently receiving £40k p.a. tax free dividends and the NAV's (even minus the average 7.5% for selling back to the managers) are 28% up on the original buy prices.

I have a number of limited life VCT's, so although the overall exposure is 16% of my NAV it will reduce over the next few years. Looking forward, because having the tax free dividends reduces the need to draw on my pension I may well keep them indefinitely. Sadly, they are not IHT free but I will address that in the future with my overall tax planning.

One last bonus if of course you can sell after five years (either getting the proceeds of a limited life wrap up or selling to the managers) and then buy more - you get another 30% tax relief and this is against any income, not just earned income like a pension contribution. So - for example - I could withdraw £100k from my pension and instead of paying the roughly £30k tax, I would sell VCT's and then repurchase having been charged around £7.5k instead of £30k.

Of course, all of this depends on future Governments not meddling with the system but we have to work with what we know

paulypost

"Re-cycling" mature VCT's - I have come across a note in the Risk Factors section of Apollo appln form that this cannot be done within the same VCT without losing the tax benefit. Does that mean that all you VCT investors have an array in order to go on getting tax relief effectively from the same capital? I have tended to stick with the same provider (Apollo) because of good returns. To re-cycle my original (now 7-yr old) investment I therefore need a new VCT - any suggestions?

jamesd

The t30% initial tax relief tax benefit applies to purchasing new shares from a VCT. The tax free income and no CGT applies to both initial purchases of new shares and to those bought on the secondary market. I'm not sure what the Apollo application is referring to in their caution. You're perfectly free to sell some Apollo shares and buy more in a new issue, if they make a new issue, and get the 30% initial tax relief on the new issue purchase. At the moment they don't appear to have a new share issue offer open, so the application form you have might be for buying from them some previously issued shares, which wouldn't attract that 30% relief.