Tax efficient income help?

dunstonh

but I don't understand what you are asking. In my post I said I want to take out 3-4% of the total value of my stocks and shares investments each year (so as in theory not to run the total pot down) and will make a profit on a buy to let property. What further strategy detail are you asking for?

How are you investing? Asset allocation, sector allocation, multi-asset solution, high yield etc Or is it just a bit of random selection?

How are you disinvesting for income? Yield, Cash fund for short term withdrawals, a mixture of capital and income from sale of units, phasing your portfolio to have short, medium and long term segments?

Which tax wrappers are you using and how are you taking your the withdrawals? (unwrapped could allow you to use your annual CGT allowance, ISAs can provide a tax free income and pensions can use up your personal allowance.....).

toggley

[QUOTE=Linton;68582756]If by BTL you mean net income from rent after discounting expenses and "BTL" includes income transferred from SIPPs, bank, interest, pensions etc you can take what you list plus dividends are tax free as long as your total income (not capital gains) is below the higher rate band. Dont forget the Mrs can do the same if she owns the appropriate assets. So with care you could get £50K or more between you completely tax free.

Of course once you get your S&S into ISAs any income or capital gains is tax free. This obviously avoids a lot of tax hassle and is worth doing for that reason alone.[/QUOTE]

Yes, the BTL income is rent after discounting all allowable expenses. That income totals about £10K p.a.

atush wrote: »

You want to be tax efficient, yet you hold a BTL.

which is a VERY tax inefficient vehicle?

Ypu pay tax on income, you pay tax on gains? How much do you have in gain now? Is your spouse a co-owner? it could be time to sell it, and move the money to sipp etc to be more tax efficient?

Tax efficiency is not my primary goal. The BTL property has given strong capital appreciation and adds diversification from the stock and bond markets. My question is not about wanting to change my investments, but asking how best to withdraw capital from these investments most tax efficiently.

dunstonh wrote: »

How are you investing? Asset allocation, sector allocation, multi-asset solution, high yield etc Or is it just a bit of random selection?

How are you disinvesting for income? Yield, Cash fund for short term withdrawals, a mixture of capital and income from sale of units, phasing your portfolio to have short, medium and long term segments?

Which tax wrappers are you using and how are you taking your the withdrawals? (unwrapped could allow you to use your annual CGT allowance, ISAs can provide a tax free income and pensions can use up your personal allowance.....).

How are you investing?
The ISA, SIPP, and unwrapped stocks and shares all have the same asset allocation which I rebalance when required. 75% is allocated across UK, Global, Emerging Markets, Small Cap, and High Dividend Yield, and 25% bonds. All are accumulation funds.

How are you disinvesting for income?
At the moment I am not. As I said I am 50 and we need an income of about £50K p.a. from age 55. My plan is to take 3-4% per annum once a year from the total off all ISA, SIPP and stocks and shares investments, plus my net profit on BTL income.

So for example, at the moment my BTL generates £10K after allowable expenses per annum. So this will be one source of income. On top of that, I would draw as follows:
ISA value £200K
SIPP value £200K
Unwrapped £600K
Total £1M

So if I was to withdraw at a rate of (for example) 4% p.a I would withdraw £40,000. My question is whether to just take 4% from each or to withdraw from one before withdrawing from another?

bigadaj

It makes things easy in some ways that all your pots are similarly invested, though there could be some logic in changing this, for example aiming for growth in your unwrapped investments and income in your Isa and sipp to reduce income tax liability. Also holding bonds in the isa would probably be tax efficient.

It would make sense to draw largely from unwrapped as this is the element open to tax, ideally using capital gains up to the allowance limits each year to pay no tax on that first £11kish, twice as a couple. The Isa can also be used each year to shelter more money from tax.

I'd be tempted to have a reasonable cash pile to draw on as well, and given what you can get in interest laying current accounts and the tax free interest allowance coming in from next year then this could provide a buffer on which to draw, to allow investment sales to be timed to some extent depending in market conditions.

Even with no earns income you should also be able to put the minimum amount into your pension going forward with basic tax relief, so £2880 net currently.

kidmugsy

If you are going to depend on investment income and face 40% income tax, why not move chunks of assets to your wife? She won't be facing 40% tax too, will she? I hope you're filling her pension too.

Linton

Suggest you use the next 5 years to get a significant amount of your unwrapped into ISAs and SIPPs. Between you in that time you can get £150K into into S&S ISAs, and by maxing out your pensions presumably much more into SIPPs. Do you have work pensions?

toggley

Linton wrote: »

Suggest you use the next 5 years to get a significant amount of your unwrapped into ISAs and SIPPs. Between you in that time you can get £150K into into S&S ISAs, and by maxing out your pensions presumably much more into SIPPs. Do you have work pensions?

I cannot move more into the SIPP or ISA from the unwrapped funds as we are already planning to use up the full allowances for both from income and and employers pension contributions to the SIPP. So either way I will be left with a substantial fund that is unwrapped. I think I could gift half of the unwrapped investments to my wife to enable us to use both our annual capital gains tax free allowances each year as kidmugsy suggested.

Thrugelmir

toggley wrote: »

but at the moment we feel more comfortable not having all our investment capital in stocks and bonds.

Rising interest rates are likely to have a correlated impact on BTL as well as stocks and shares.

toggley

As all my funds are accumulation reinvested can anyone explain the significance of dividends and capital growth and why it matters for different investment types, SIPP, ISA, and unwrapped?

I chose accumulation reinvested because I want capital growth. I thought that the SIPP, ISA, and unwrapped funds values can go up or down each year, but if I don't touch the funds then I don't need to declare anything on the tax return. But when I start drawing an income from my investments I planned to take a straight 3% of the total value each year, so if the combined investments are £1m (£200K SIPP, £200K ISA, £600K unwrapped) we would take out £30,000 as a cash withdrawal (£6K from SIPP, £6K from ISA, £18K unwrapped). Then on the tax return I would have to declare £30,000 of income and pay tax accordingly (after personal allowances).

But reading the replies I get the impression that it isn't that simple!

Until now during the accumulation stage I have duplicated the same funds and allocation across all 3 investment vehicles, as that makes keeping the desired (total) allocation rebalancing more straight forward. As there are limits to the amounts we could put in our ISAs and SIPP, most of our investments have to be unwrapped. I think what matters is the total asset allocation across all 3 investments, and trying to keep that allocation in line looks like it could be harder if certain types of fund are within just the SIPP or ISA. So any suggestions how to approach this would be very welcome!

kidmugsy

If you haven't been declaring the dividends on your unwrapped funds you've been a naughty boy. The fact that they're accumulating units doesn't matter. It's up to you to find out what the divis were and declare them.

You'd be mad to take income from inside SIPPs and ISAs while you've still got unwrapped funds. Accumulate the divis inside the tax shelters, and take money from the unwrapped - both divis and capital realisations. Make sure you use your personal allowance too.

Sounds to me as if you need to see an accountant.

jamesd

toggley wrote: »

I chose accumulation reinvested because I want capital growth.

Best to switch to income versions for the ones outside the tax wrappers because it'll make your tax accounting easier. For accumulation units you need to track all of the distributions that would have been made and increase the purchase price used in the CGT calculation.

toggley wrote: »

Until now during the accumulation stage I have duplicated the same funds and allocation across all 3 investment vehicles

That's not optimal. To reduce the tax bill what you want is:

1. Growth-oriented investments outside any tax wrapper. This is because you get an annual use it or lose it capital gains tax allowance so a way to take "income" out of capital from these investments. You can use this allowance each year by holding similar investments and swapping between them. For example, you might alternate between two UK FTSE All Share Index trackers as part of routine use of your CGT allowance.

2. Take "income" from capital of the money outside the tax wrappers as first choice. This way the percentage of total assets that is in the tax wrappers increases over time. It has the advantage of not counting towards income tax, so you can probably avoid being a higher rate tax payer.

3. If you need to take other income sources, dividends outside a tax wrapper are first choice while you're in the basic rate income tax band.

4. If your taxable income is in the low enough range, remember the new tax relief on interest. You might be able to arrange to be in this band by careful selection of how you take your "income". VCT buying doesn't help to keep you in this range, pension contributions do, VCT income is tax free and does.

5. You can eliminate a tax bill by buying VCTs and VCTs are around that do secured lending and offer completely tax free dividends in the 7-11% range, for all income tax rates. 30% initial tax relief. Can sell after five years to get the money out. Think of it as a way to save tax by deferring income for five+ years. What you do is buy, use the 30% tax relief as income, then sell the 90-100% capital plus/minus growth loss after five years. 90% because there are usually buying charges so your initial share value ends up between 90% and100%, not 100% of the purchase price.

6. If you need to take money out of tax wrappers, the preference I'd use is pension, ISA, VCT or pension VCT, ISA depending on how the percentage and diversification fits within your risk tolerance and balanced investment goals.

7. If you want to hold bonds, hold them inside a pension or ISA because that protects from tax. if you want to draw the bond income, use the ISA or consider using the pension and using VCT buying to avoid tax.

You should be able to completely avoid all income tax bill with a combination of proper structuring of how you take your "income" and some use of VCT buying to defer income.