Bed & Breakfast VLS80 > VLS100?

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  • hutmanhutman Forumite
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    For the purposes of simplicity for newbs like me could someone clarify:

    - If all gains on ISA threshold (£15,240) are tax free?

    - Gains on normal trading account are tax free up to a point - £11,000?? After which it will be 20% tax on the gains made. Is there any simple moves to benefit the investor such as selling the fund and buying another once the investment gains (if any) are encroaching on the maximum threshold?

    Any explanations with simple examples would be most welcome!
  • bowlhead99bowlhead99 Forumite
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    Malthusian wrote: »

    Why leave it up to HMRC to decide whether selling Inc and buying Acc was a switch (CGT rebased) or a reorganisation (CGT stays the same) when it is in their interests to treat it as a reorganisation because it means you pay more tax? They are not just judge jury and executioner, but the prosecution as well.

    Well, you don't leave it up to HMRC to decide. We have a self assessment regime, and you decide yourself. If you sold Inc and bought Acc - you can decide yourself, that it was not a switch, with impunity: because the actual legislation for exchanges refers to units being exchanged, and you did not exchange any units for any other units. A "switch" is simply the casual layman's term used in the Guidance, as a substitute for the legislative / regulatory term "exchange"in relation to your holdings in the fund. It cannot apply to cash sales.

    In your example there is nothing to fear from HMRC's funny matching rules where you sold units and used the proceeds to buy other units (which are a different class). You will have a statement showing the redemption and subscription requests being honoured, and the cash value of the proceeds which settle to clear the fund manager's obligation to you and yours to him. Such transactions are not share-for-share exchanges.

    I do agree that if you are uncertain about tax legislation, your personal position, or the logistics employed by your platform or fund manager in response to your investment, reinvestment, or trade requests, it's probably best to only employ the simplest of activities within your tax planning. A complete change of funds is obviously very "clean" from a tax perspective. Of course, for a majority of people that could mean changing funds to something different with similar risks, rather than selling an 80% equity fund to buy a 100%equity fund or using something with a markedly different regional or sectoral focus.
  • dunstonhdunstonh Forumite
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    - If all gains on ISA threshold (£15,240) are tax free?

    No. All gains in an ISA are tax free. no limit applies.
    - Gains on normal trading account are tax free up to a point - £11,000?? After which it will be 20% tax on the gains made. Is there any simple moves to benefit the investor such as selling the fund and buying another once the investment gains (if any) are encroaching on the maximum threshold?

    Gains on disposals are what matter. Not unrealised gains. The current allowance is £11,100.

    Yes there are simple things to do to mitigate CGT. Such as bed & ISA and mitigating any unused CGT allowance through disposals.
    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • edited 29 July 2016 at 3:33PM
    bowlhead99bowlhead99 Forumite
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    edited 29 July 2016 at 3:33PM
    hutman wrote: »
    - Gains on normal trading account are tax free up to a point - £11,000?? After which it will be 20% tax on the gains made. Is there any simple moves to benefit the investor such as selling the fund and buying another once the investment gains (if any) are encroaching on the maximum threshold?
    The threshold is basically an exemption for the first £11,100 of gains that are made in any tax year, across all the CGT eligible things that you sell in that tax year.

    You only make a gain when you actually sell, so buying something for £20000 which happens to be worth £30,000 or £40,000 a year later does not mean you automatically have a problem. You only potentially have a problem, because if you were to sell it all at once you would make a large gain, and if your total gains that you want to cash out in any one year exceed the £11.1k, you have a tax bill. The size of the bill depends on your rate for CGT which depends on whether you're a higher or lower rate taxpayer.

    So yes, some people will see they are sitting on decent gains and cash some of them in.

    For example, say you had bought 20,000 shares over the years in asset A for an average of £1 each, and paid £60 of stamp duty and dealing cost when buying then. The total cost of the whole pile of shares is £20060. And now they are £2 each so you *could* sell them for £40,000, less £10 dealing costs is £39990 net; and £39990 proceeds less £20060 cost gives you a gain that's significantly bigger than your allowance. And you think that next year you night have an even bigger problem because they will be even more valuable.

    So what you could do instead is sell half of the shares now for £20,000 less £10 dealing costs = £19990. You would then have to look at what that half of the shares that you just sold had cost you over the years, and you would see that the whole stack of shares had cost £20060 so the half you just sold had original cost of £10030.

    You compare the £19990 with the £10030 and the profit you just made was £9960 which is comfortably inside the annual exemption. You have capacity to make £1140 more gains this year if you want to, before you run out of exemption for this year. But you don't want to sell good investments just for the sake of it. So you keep the other 10000 shares, and don't sell them. They're still worth £2 each which is another £20k value, on paper.

    With your £19990 proceeds you buy £19990 worth of shares in asset B.

    So at this time, instead of having £40,000 of Asset A shares with a cost of £20060, you have about £20,000 worth of asset A with a cost of £10030 and about £19990 of asset B shares with a cost of £19990.

    Next year if you need money you can either sell some A shares (and probably crystallise more gains, but hopefully within your next annual exemption) or some B shares, which do not have much gain built up, and might even be on a loss by then; or a bit of both.

    Or you might decide that when you got the £19990 of cash proceeds you were going to stick the first £15k of it into an ISA so you didn't have to worry about the future gains being taxed.

    It can be quite easy to manage annual exemptions by selling things and buying other things and always using a bit of annual exemption as you go, but does require planning and record keeping. What you want to avoid is getting 30 years down the line and needing to cash in a large portion of your portfolio that has appreciated significantly and realising you have missed the chance to use thousands and thousands of pounds of annual allowance.

    Oh and yes you are right, anything bought inside an ISA wrapper is free of income tax and capital gains tax. You could buy £10k of assets there and hold them into they are worth £50k and nobody would care. But as the contents if the ISA are invisible to the taxman, losses on stuff inside an ISA can't be offset to reduce the tax bill on the gains outside the ISA.
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