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Tax efficient income help?
Comments
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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.
So I have to calculate the amount of dividends paid into all the funds every year. I wonder if any of the on-line trading platforms offer this calculation automatically?
How do I calculate capital gain? Do I just record the total amount of money paid into a fund to date, e.g. £100,000 over a 10 year period. Then take the total fund value at the end of the tax year, e.g £140,000. Then say I have made a £40,000 gain. Or is it only declarable when I cash in some or all of the gain, so if I take out £20,000 then I declare a capital gain of £20,000? If the fund drops in value by the next tax return, say it is £90,000 and I want to take £20,000 out, do I just take the £20,000 and there is no capital gain to declare?
Maybe I do need to see an accountant. But I'd like to understand the approach from the financial investments strategy side so that I have some idea of how and why myself.0 -
They should all provide a tax certificate at the end of each tax year.
Ah, jem, is that "should" in the sense of 'they will have, but you might have thrown it in the bin', or "should" in the sense of 'devoutly to be wished but I wouldn't bet on it'?Free the dunston one next time too.0 -
How do I calculate capital gain? Do I just record the total amount of money paid into a fund to date, e.g. £100,000 over a 10 year period. Then take the total fund value at the end of the tax year, e.g £140,000. Then say I have made a £40,000 gain. Or is it only declarable when I cash in some or all of the gain, so if I take out £20,000 then I declare a capital gain of £20,000? If the fund drops in value by the next tax return, say it is £90,000 and I want to take £20,000 out, do I just take the £20,000 and there is no capital gain to declare?
You make a Capital Gain only when you sell an investment. You have to take the realisation, and subtract from it what you paid for the shares, which I'd guess is some mixture of the prices you paid over the years, from your first investment through all the accumulation actions. As you may guess, I've made darn sure I've never had to do anything so tedious.Free the dunston one next time too.0 -
It's usually something you'll get as part of a statement from the platform. If not, ask their customer service. If still no joy, ask the fund house and tell them the unit types involved, bearing in mind that those might have changed over the years. They should be able to supply past information for you.So I have to calculate the amount of dividends paid into all the funds every year. I wonder if any of the on-line trading platforms offer this calculation automatically?
Yes, you use sale price less allowable costs less average purchase cost to work out your gain. The catch is that your purchase cost is the purchase cost plus all of the money the accumulation units paid into the fund over the years and it'll be different for each purchase.Do I just record the total amount of money paid into a fund to date, e.g. £100,000 over a 10 year period. Then take the total fund value at the end of the tax year, e.g £140,000. Then say I have made a £40,000 gain.
Only when you sell and then you only have to tell HMRC if your gain is over the annual allowance or you want to claim an allowable loss for future use or the proceeds of all sales in the tax year are 4 times the annual allowance (currently 4 x 11,100) or more (regardless of profit or loss).Or is it only declarable when I cash in some or all of the gain
If you sold £20,000 of the £140,000 your unadjusted purchase price would be £20000 / £140000 * £100,000 = £12,285.71. The capital gain would be £20,000 - £12,285.71 = £7,714.29. But that is really too high because all of the reinvested dividends would have raised the allowable purchase price. So your purchase price would be more like say £120,000 than £100,000.so if I take out £20,000 then I declare a capital gain of £20,000?
That would be OK provided that the total value of all of your sales during the year does not exceed the 4 times annual CGT allowance threshold. Selling a BTL would count, not just shares or funds.If the fund drops in value by the next tax return, say it is £90,000 and I want to take £20,000 out, do I just take the £20,000 and there is no capital gain to declare?
I suggest that you start the process of making gradual sales that produce gains within the CGT allowance now, switching to income units. Or selling to produce "income". Then over time this problem will go away.
If you only know the purchase prices and not the extra in accumulation units from the dividend reinvestment, you can tell HMRC this and they would probably accept that calculation because they know that it would increase the potential tax, not decrease it. So potential loss for you, not them.0 -
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[/URL].
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.
jamesd thank you for taking the time to offer such a detailed assessment of options.
1. Growth-oriented investments outside any tax wrapper. I understand why it would makes sense to use the annual CGT allowance. However which funds are 'growth'? In my case I think all my equity funds are growth - it is just that they are diversified (UK, global, EM, pacific, etc.) so the growth may be in one or other at varies times over the long-term. Maybe my bonds allocation is not 'growth' but again in some periods bonds can surge. I suppose I am asking how to decide what funds go outside the tax-wrapper as no-one knows where future growth will be.
Also it seems counter-intuitive to put growth funds outside the ISA tax wrapper. Everything in the ISA is exempt from income tax and CGT on the investment returns and no tax is paid when money is withdrawn. So wouldn't it still make sense to get as much growth as possible in the ISA because it won't be taxed in any case.
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. I don't follow. By taking "income" you mean simply making a cash withdrawal from the total fund value, e.g. sell £10,000 of units across the funds in the unwrapped share dealing portfolio and withdraw the cash?
"This way the percentage of total assets that is in the tax wrappers increases over time." So each year I keep selling units and running down the unwrapped share dealing account, until I am possibly left with just an ISA and SIPP? Sounds scary letting any of the pots run down, as I said I was planning to withdraw 3-4% maximum of the pot value every year, so that the pots would hopefully still grow and keep their real value. But are you saying that the SIPP and ISA could be left untouched, and therefore continue to benefit from additional compound growth, so the total value of across all 3 investment pots would come out the same in the long-term? Would the SIPP and ISA still keep pace if all the growth funds were in the unwrapped pot which is being stripped annually - while the SIPP and ISA have the less attractive non-growth allocations (your point 1).
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
So if I remain in the lower rate tax band it makes sense to take dividends from the unwrapped too. So everything - dividends - plus capital, is coming out of the unwrapped? With chunks of capital being withdrawn, and dividends too, then without dividend reinvestment the unwrapped pot is surely going to wither rapidly. But this is all part of the plan?
6. If you need to take money out of tax wrappers, the preference I'd use is pension, ISA,
don't have any VCTs but will look into these. With my present set up of a SIPP and and ISA, you are saying that you would take from the SIPP first, so the ISA is really the last thing to take from? Is that from a tax efficiency perspective, or for another reason? Until the recent pension changes I would have understood without question, but as passing on the SIPP as part of an inheritance is now a lot more attractive maybe this isn't so clear cut in my case? We do want to leave as much as we can which is why we want our withdrawal rate 3-4% to keep the investments sustainable.
Thank you again for a brilliant reply I am sure you are right - I am probably just not fully understanding the finer points of the strategies.0 -
We could go into more detail of the reasoning behind the advice that has been given but as it seems so alien to you it may be best for you to use the services of an ifa or an accountant.
You appear to view your entire holdings as one amorphous thing, whereas it is made up of many different elements. These elements are held for different reasons, and the different constituents are best held in different forms due to tax treatments especially, so you either need to do more reading and self education or employ an advisor.0 -
Right. Reducing the pot outside tax wrappers is part of the plan. Eventually all of your money might be protected from income tax inside the tax wrappers.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
So if I remain in the lower rate tax band it makes sense to take dividends from the unwrapped too. So everything - dividends - plus capital, is coming out of the unwrapped? With chunks of capital being withdrawn, and dividends too, then without dividend reinvestment the unwrapped pot is surely going to wither rapidly. But this is all part of the plan?
Yes, that's right, ISA last. This is because the ISA has no tax on income taken from it, while the pension does. So future pension income is vulnerable to an increase in income tax, while future ISA income isn't.6. If you need to take money out of tax wrappers, the preference I'd use is pension, ISA,
don't have any VCTs but will look into these. With my present set up of a SIPP and and ISA, you are saying that you would take from the SIPP first, so the ISA is really the last thing to take from? Is that from a tax efficiency perspective, or for another reason? Until the recent pension changes I would have understood without question, but as passing on the SIPP as part of an inheritance is now a lot more attractive maybe this isn't so clear cut in my case? We do want to leave as much as we can which is why we want our withdrawal rate 3-4% to keep the investments sustainable.
I'm assuming with this order that inheritance tax won't be a factor. That could be because your estate will be too small or it could be because you would try to give away capital out of income in the many years before death. Regular gifts out of income don't count towards inheritance tax. Later on what you'd do is switch to inheritance tax planning rather than income tax planning. That might favour taking money from ISA (potentially subject to inheritance tax ) instead of pension (not subject to inheritance tax). But this is not certain because it's a long, long time until you can expect to die and rules can change again to make pensions less attractive. Also under the current rules, for death after age 75 the pension pot money is taxed as normal income when the person takes money out of it. If their income tax bracket is 40% or 45% that means that the difference between 40% inheritance tax and the pension after age 75+ death isn't a factor anyway, or paying inheritance tax may even be cheaper than the pension if they are paying 45% income tax. This difference will matter more if they are a long term non tax payer (maybe stay at home person, with full tax free and basic rate band for withdrawing at less than 40%) or long term basic rate payer with no prospect of higher or top rate.
So you're right that the recent changes have made inheriting pensions more attractive in general, but consider the numbers and the situation of the potential beneficiaries and it could turn out that the pension might even be more costly than inheritance tax. Just less "more" than before.
So far as VCTs go, you can get a good start by doing an advanced forum search for the topic VCT and user name jamesd. Key thing to know is that risk levels vary, so while on average they are higher risk than some other investments, you can pick and choose and I mostly mention the low risk end, secured on property.
Initially, growth means "anything that is expected to do more capital growing than paying out money in interest or dividends. So equity income funds or bond funds would not be "growth" so much as a global growth or emerging markets fund.1. Growth-oriented investments outside any tax wrapper. I understand why it would makes sense to use the annual CGT allowance. However which funds are 'growth'? In my case I think all my equity funds are growth - it is just that they are diversified (UK, global, EM, pacific, etc.) so the growth may be in one or other at varies times over the long-term. Maybe my bonds allocation is not 'growth' but again in some periods bonds can surge. I suppose I am asking how to decide what funds go outside the tax-wrapper as no-one knows where future growth will be.
When it comes to bond funds I'm assuming that you will sell those and rebuy them inside the ISA, selling some growth funds inside the ISA to keep the overall percentage split the same. That's because the interest from bond funds is subject to income tax so you want to move that into the ISA where it isn't. The new annual allowance for interest complicates this decision a bit, because if your taxable income is low enough it's OK to have some interest outside the ISA to let you use this tax free interest allowance.
It's good to get as much growth as possible in the ISA. To do that you try to shift as much of your money as possible into it. You do that by selling investments outside the ISA first, not taking anything at all from inside the ISA.Also it seems counter-intuitive to put growth funds outside the ISA tax wrapper. Everything in the ISA is exempt from income tax and CGT on the investment returns and no tax is paid when money is withdrawn. So wouldn't it still make sense to get as much growth as possible in the ISA because it won't be taxed in any case.
Yes, that's what I mean.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. I don't follow. By taking "income" you mean simply making a cash withdrawal from the total fund value, e.g. sell £10,000 of units across the funds in the unwrapped share dealing portfolio and withdraw the cash?
Yes, that's right."This way the percentage of total assets that is in the tax wrappers increases over time." So each year I keep selling units and running down the unwrapped share dealing account, until I am possibly left with just an ISA and SIPP?
Right.Sounds scary letting any of the pots run down, as I said I was planning to withdraw 3-4% maximum of the pot value every year, so that the pots would hopefully still grow and keep their real value. But are you saying that the SIPP and ISA could be left untouched, and therefore continue to benefit from additional compound growth, so the total value of across all 3 investment pots would come out the same in the long-term?
Yes, because you wouldn't be selling the growth funds inside the SIPP and ISA. So over time those would end up with ever-higher portions of the growth.Would the SIPP and ISA still keep pace if all the growth funds were in the unwrapped pot which is being stripped annually - while the SIPP and ISA have the less attractive non-growth allocations (your point 1).
What you do as part of this is stop planning to keep the investments the same in all three pots. Instead it's partly about working out the overall split then trying to arrange for each piece to be held inside its best tax wrapper.
Just continue asking until you do.Thank you again for a brilliant reply I am sure you are right - I am probably just not fully understanding the finer points of the strategies.
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Right. Reducing the pot outside tax wrappers is part of the plan. Eventually all of your money might be protected from income tax inside the tax wrappers.
Yes, that's right, ISA last. This is because the ISA has no tax on income taken from it, while the pension does. So future pension income is vulnerable to an increase in income tax, while future ISA income isn't.
I'm assuming with this order that inheritance tax won't be a factor. That could be because your estate will be too small or it could be because you would try to give away capital out of income in the many years before death. Regular gifts out of income don't count towards inheritance tax. Later on what you'd do is switch to inheritance tax planning rather than income tax planning. That might favour taking money from ISA (potentially subject to inheritance tax ) instead of pension (not subject to inheritance tax). But this is not certain because it's a long, long time until you can expect to die and rules can change again to make pensions less attractive. Also under the current rules, for death after age 75 the pension pot money is taxed as normal income when the person takes money out of it. If their income tax bracket is 40% or 45% that means that the difference between 40% inheritance tax and the pension after age 75+ death isn't a factor anyway, or paying inheritance tax may even be cheaper than the pension if they are paying 45% income tax. This difference will matter more if they are a long term non tax payer (maybe stay at home person, with full tax free and basic rate band for withdrawing at less than 40%) or long term basic rate payer with no prospect of higher or top rate.
So you're right that the recent changes have made inheriting pensions more attractive in general, but consider the numbers and the situation of the potential beneficiaries and it could turn out that the pension might even be more costly than inheritance tax. Just less "more" than before.
So far as VCTs go, you can get a good start by doing an advanced forum search for the topic VCT and user name jamesd. Key thing to know is that risk levels vary, so while on average they are higher risk than some other investments, you can pick and choose and I mostly mention the low risk end, secured on property.
Initially, growth means "anything that is expected to do more capital growing than paying out money in interest or dividends. So equity income funds or bond funds would not be "growth" so much as a global growth or emerging markets fund.
When it comes to bond funds I'm assuming that you will sell those and rebuy them inside the ISA, selling some growth funds inside the ISA to keep the overall percentage split the same. That's because the interest from bond funds is subject to income tax so you want to move that into the ISA where it isn't. The new annual allowance for interest complicates this decision a bit, because if your taxable income is low enough it's OK to have some interest outside the ISA to let you use this tax free interest allowance.
It's good to get as much growth as possible in the ISA. To do that you try to shift as much of your money as possible into it. You do that by selling investments outside the ISA first, not taking anything at all from inside the ISA.
Yes, that's what I mean.
Yes, that's right.
Right.
Yes, because you wouldn't be selling the growth funds inside the SIPP and ISA. So over time those would end up with ever-higher portions of the growth.
What you do as part of this is stop planning to keep the investments the same in all three pots. Instead it's partly about working out the overall split then trying to arrange for each piece to be held inside its best tax wrapper.
Just continue asking until you do.
Fantastically helpful attitude. Thank you.
Mentioned earlier on was the strategy of moving over to 'income' rather than 'accumulation' funds as a way to make life easier. I think this was about making life easier for income tax self assessment? Is this because accumulation funds reinvest the dividends, whereas income funds pay the dividends into the cash holdings in the client account, therefore calculating the total dividend income received is just about looking at the total amount of cash added to the client account during the period? Also this is only relevant to higher rate earners, so long as my income does not exceed this amount then I could stick with 'accumulation' funds without worrying about dividend income calculations.0 -
Also this is only relevant to higher rate earners, so long as my income does not exceed this amount then I could stick with 'accumulation' funds without worrying about dividend income calculations.
But how could you or HMRC know whether you should be paying higher rate tax unless you calculate those divis?Free the dunston one next time too.0
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