Tax efficient income help?

toggley

Yes I see. Thanks!

toggley

It has been suggested that it is possible to gift a portion of unwrapped S&S investments to a spouse so that both can withdraw cash and use two CGT allowances.

When this is done, how is the CGT calculated? If for example the total invested was £100,000 and the portfolio of funds now has a value of £140,000, the the gain (excluding dividend re-invested calculations) is £40,000. The £140,000 fund is split 50-50 so each has £70,000. Does each now start with a capital gain of £20,000 (£40,000/2), from which each can withdraw up to the CGT-free limit annually, until the gain has been totally realised? If both pots continue to grow (e.g. to £80,000 each) then if nothing had been realised then each now has capital gains of £30,000 from the starting point of the split.

Is this how it works?

jamesd

toggley wrote: »

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?

Yes. It's mainly about working out how much dividend money has been reinvested so you an get the corrected average buying price for the accumulation units and make a correct CGT calculation. Easier to sidestep it, take the income, and reinvest when you choose to so you can at that time make any required notes - and also it's easier to go back and get info on past explicit deals.

toggley wrote: »

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.

It's relevant to anyone who might sell total assets of more than four times the annual CGT allowance (whether making a profit or a loss) or who sells and makes a profit above the annual CGT allowance.

The issue isn't the taking of income and income tax, it's the CGT calculation mess if you use accumulation units.

jamesd

toggley wrote: »

It has been suggested that it is possible to gift a portion of unwrapped S&S investments to a spouse so that both can withdraw cash and use two CGT allowances.

That is an excellent idea and i also recommend it.

toggley wrote: »

When this is done, how is the CGT calculated?

For a married couple still living together it's on the same average purchase cost basis as if you were selling directly, just with the CGT allowance of the other person. So exactly the same calculations needed. So when you give the investments to her, also give her the calculation worksheet showing her average purchase cost.

Also note that a transfer like this is a "disposal" for CGT purposes. Which means it counts towards the rule that disposals worth 4 x CGT allowance must be reported in a tax return regardless of profit or loss. The value of the gift is number of units times average purchase cost.

toggley wrote: »

If for example the total invested was £100,000 and the portfolio of funds now has a value of £140,000, the the gain (excluding dividend re-invested calculations) is £40,000. The £140,000 fund is split 50-50 so each has £70,000. Does each now start with a capital gain of £20,000 (£40,000/2), from which each can withdraw up to the CGT-free limit annually, until the gain has been totally realised? If both pots continue to grow (e.g. to £80,000 each) then if nothing had been realised then each now has capital gains of £30,000 from the starting point of the split.

Is this how it works?

Yes.

Something we haven't mentioned before is that if you made a purchase before April 2008 you may be entitled to indexation relief on the increase in value. Indexation relief is an allowance for inflation. It increases the effective average purchase price, reducing the CGT gain. Only relevant outside tax wrappers.

You seem to be doing pretty well at starting to understand the issues involved in all of this.

toggley

Thanks again jamesd.

toggley

jamesd wrote: »

That is an excellent idea and i also recommend it.

For a married couple still living together it's on the same average purchase cost basis as if you were selling directly, just with the CGT allowance of the other person. So exactly the same calculations needed. So when you give the investments to her, also give her the calculation worksheet showing her average purchase cost.

Also note that a transfer like this is a "disposal" for CGT purposes. Which means it counts towards the rule that disposals worth 4 x CGT allowance must be reported in a tax return regardless of profit or loss. The value of the gift is number of units times average purchase cost.

Yes.

Something we haven't mentioned before is that if you made a purchase before April 2008 you may be entitled to indexation relief on the increase in value. Indexation relief is an allowance for inflation. It increases the effective average purchase price, reducing the CGT gain. Only relevant outside tax wrappers.

You seem to be doing pretty well at starting to understand the issues involved in all of this.

The value of the gift is number of units times average purchase cost

The average purchase cost, not current value? That looks important and not what I would have expected. But I think I can see why. Is this because none of the current value has been realized by the beneficiary at the point of transfer.

kidmugsy

toggley wrote: »

The value of the gift is number of units times average purchase cost

The average purchase cost, not current value? That looks important and not what I would have expected. But I think I can see why. Is this because none of the current value has been realized by the beneficiary at the point of transfer.

It's to stop you using your wife as a tax avoidance scheme on a truly heroic scale. They would like the prospect of collecting some CGT when she sells.