Vanguard Lifestrategy

dunstonh

Don't want to derail thread but why is known as Bed & ISA?

It originates from the old capital gains tax process known as bed & breakfast. This is where you sold shares/funds to create a disposal and then would buy them back again. It would allow you to utilise your CGT allowance.

bed & ISA came about because you still had the disposal but you would buy them back within the ISA.

Is it no different in practice to putting £5240 out of savings into the S&S ISA in that year?

In respect of using the ISA allowance it is no different. However, it involves the sales of existing unwrapped holdings which could result in some CGT allowance being used (and possibly some CGT becoming payable if over the allowance).

Most brokers offer to only charge one fee for the two transactions so it is a little cheaper.

On the advice side, I would say most providers/platforms incur no costs in doing this. However, DIY pricing can be different and it is something to look out for.

Dunney77

dunstonh wrote: »

To work backwards....

Think of tax wrappers as a container for your investments. You can use the same investment across multiple containers (tax wrappers).

So, you can have L&G MI5, BC100 or VLS100 or whatever in any of the containers and you would get exactly the same returns and exactly the same charges. The only difference with tax wrappers is the tax handling and the maturity process (in the case of pensions in particular).

This year you invest £15240 in the ISA and surplus in the unwrapped account. Next year you may only invest £10,000 in the ISA. You would have a surplus £5240 ISA allowance available. So, you could move £5240 from the unwrapped account into the ISA account. That is known as bed & ISA.

Thank you for clarifying this! Has made the investment process tricky.

If you sell just before the capital gains allowance is reached and put it in an ISA, and the original lump sum grows again towards the allowance limit, will the 'new' gains be taxable as an original gain or will the original £10k taken out still be part of the gains to be taxed?

green_man

If you sell just before the capital gains allowance is reached and put it in an ISA, and the original lump sum grows again towards the allowance limit, will the 'new' gains be taxable as an original gain or will the original £10k taken out still be part of the gains to be taxed?

You have an allowance per year, so sell just enough to keep within the yearly limit then save the rest until the next tax year when you can sell a chunk more.

bowlhead99

The gain is the difference between what you paid for the share units and what you sold them for.

If you buy 5000 units at 90p and then later buy another 5000 units at £1.10 you end up with a big pile of 10,000 units that cost you £10000 or an average of £1 a unit.

If you later sell 3000 units at £5 to give you £15000 cash to put in your current year ISA, you would look at the cost of those 3000 units and say, ok, I bought them for £1 each and sold for £5 each, that's a gain of £4 a unit times 3000 units so I have a gain of £12000.

That's just a bit more than your annual exempt amount of £11,100 for the 2015/16 tax year so if you had no other sale transactions that year you might prefer to just not sell a few of those 3000 units, to bring down the total gains and avoid paying tax on the surplus £900 of gains. You could wait until the following year when you get another annual allowance, and sell them then, to avoid going over your £11,100 exemption in 2015/16, and thereby avoid all taxes for that year.

Alternatively perhaps you have a whole load of shares in a different fund that you paid £3 a share for and are now only worth £2 a share. If you sold 1000 of them you would get £2000 for something that cost £3000, so that's a loss of £1000. Added to the gain of £12000 you now only have £11000 of net gains which fits neatly into your 2015/16 annual gains exemption and no tax to pay.

However, maybe later this tax year you need some more cash to spend on something important, and decide to sell another 2000 units of the first fund, out of your pile of unwrapped shares, to leave 5000 remaining. This time you sell them for £6 a share, which is £5 profit over and above your cost base of £1 each. That new £10000 of gains that you create by selling the 2000 shares at £5 profit each, will be added to all the other gains and losses you make in that 2015/16 tax year, and by now you're way way above your annual gains exemption and facing a large tax bill.

A way of avoiding that big bill would have been to avoid selling the 2000 shares until a future tax year, and just "muddling by" without those proceeds until you can get them in a way that didn't create another large gain in the same year that you already had a large gain. However if you need the money that might not work.

So of course one thing you could do is to sell 2000 of your ISA-wrapped shares instead of selling more unwrapped shares. When you sell ISA status shares, the taxman isn't interested. There are no capital gains taxes on any gains made inside an ISA or pension. So that keeps your CGT from getting too high. But the downside is you don't have so much in the ISA growing tax free forever, and you can't put more new money in the ISA for a while because you already maxed your allowance for the year.

When you go into 2016/17 or 2017/18 you get more CGT annual exemptions and more annual ISA allowances. If you sell more shares then, any gains are considered as a 2016/17 or 2017/18 event. They only "stack" with other events from that same tax year where you're realising gains and losses, and not with previous gains that you already dealt with.

So, you could make £11000 of gains in year one and £11000 of gains in year two, no problem. You could sell anything you like from within your ISA, whenever you like, no problem.You just need to make sure you're tracking your investment cost correctly, i.e. you remember that the blended cost of each unwrapped unit was a pound.

If you are busily reinvesting dividends into buying more units each year outside your ISA, or if you're invested in an accumulation class of fund that rolls your dividend money into new investments without changing the number of shares you hold... then the blended average cost of the units that you hold will be changing from a pound... and you need to track it to be able to prove to yourself and the taxman that there was no tax due on your sales when you consider the proceeds of the sale and the cost of what was sold. Or that there was tax due and you paid the right amount.