inheritance question

kidmugsy

grey_gym_sock wrote: »

that's not 100% accurate.

That's a rather generous way to phrase it; it seems my source was entirely wrong and therefore so was I. Can you point me to a better source (preferably not at gov.uk), please? I'd like to bookmark it.

Fatbritabroad

jamesd wrote: »

It's worth learning about venture capital trusts. Smaller company investing via the VCT, a listed company like investment trusts. As well as the underlying investment performance there's 30% from HMRC in the tax year of purchasing new shares, capped at your income tax liability in that year, has to be repaid if you sell within five years. Their dividends are tax exempt and they aren't liable for capital gains tax. Many look to pay out most of their gains in dividends.

There's a wide range of risk levels available, from highly speculative to VCTs that look to add money to firms with a proven product that want money to grow.

The five year restriction means that you can recycle the money to repeat the tax benefit, plus or minus what the investment performance does. Effectively using them to cut tax on your income by deferring some of it.

Ive vaguely Read about vcts but I'm not sure I'm at that stage yet. The amount outside of isas for one year is likely to be maybe 20k (though i will be adding to it each month). Hopefully one to think about in the future

grey_gym_sock

kidmugsy wrote: »

Can you point me to a better source (preferably not at gov.uk), please?

er ..... no ..... i mean: i don't have a source to hand, but the obvious searches would lead to gov.uk sites.

is a link to this forum OK? ..... polymaff's visual model of income tax included this. i think polymaff gave up that model, when tax became more complicated for 2016-17, but i attempted to update it for 2016-17 here: https://forums.moneysavingexpert.com/discussion/5631160/a-simple-visual-model-of-2016-17&page=3#55 and i think the principles are the same now, with just a few figures changed.

grey_gym_sock

Fatbritabroad wrote: »

Ive vaguely Read about vcts but I'm not sure I'm at that stage yet. The amount outside of isas for one year is likely to be maybe 20k (though i will be adding to it each month). Hopefully one to think about in the future

yes, i wouldn't really look at VCTs when you can fit nearly all your investments in ISAs and pensions.

even when you can't, i wouldn't personally go for VCTs, though there is more case for them then.

you won't necessarily be able to exit a VCT at close to its NAV, in which case some of the 30% initial tax relief is effectively lost. and perhaps the rest of it is lost in management fees (both initial fees, and very high annual fees over the 5+ years you hold the VCT).

personally, i'd rather pay my money in tax to HMRC than in charges to investment companies. opinions differ

Fatbritabroad

grey_gym_sock wrote: »

yes, i wouldn't really look at VCTs when you can fit nearly all your investments in ISAs and pensions.

even when you can't, i wouldn't personally go for VCTs, though there is more case for them then.

you won't necessarily be able to exit a VCT at close to its NAV, in which case some of the 30% initial tax relief is effectively lost. and perhaps the rest of it is lost in management fees (both initial fees, and very high annual fees over the 5+ years you hold the VCT).

personally, i'd rather pay my money in tax to HMRC than in charges to investment companies. opinions differ

Agreed. Sometimes in your quest to reduce tax its easy to lose sight of the fact that you're paying that tax because you've made money. My query stems more from laziness that i dont want the faff of filling in tax returns for what will be a relatively small amount.

That's a thought... I rent a room which i understood is tax free (it's to a friend and is mates rates 350 a month). But this plus my bonus last year plus pension contributions definitely pushes me over 100k. Does that count even though rent a room is tax free or is that separate

jamesd

Fatbritabroad wrote: »

That's a thought... I rent a room which i understood is tax free (it's to a friend and is mates rates 350 a month). But this plus my bonus last year plus pension contributions definitely pushes me over 100k. Does that count even though rent a room is tax free or is that separate

Yes. The pension contributions may keep your adjusted net income below 100k and its mandatory tax return.

jamesd

grey_gym_sock wrote: »

yes, i wouldn't really look at VCTs when you can fit nearly all your investments in ISAs and pensions. even when you can't, i wouldn't personally go for VCTs, though there is more case for them then.

They offer far more tax relief than ISA or pension investing, with that 30% every five years, tax exempt dividends and no CGT. Since I've become familiar with them I now rank them above both in many cases, though the amounts need to be appropriate for the individual. They are particularly attractive in the basic rate band for those who have many five year cycles before reaching 55, who want good of tax relief and access for retirement before 55 or who want to withdraw taxable pension money at low effective tax rates. Also for those who have had their annual allowance for pensions reduced.

grey_gym_sock wrote: »

you won't necessarily be able to exit a VCT at close to its NAV, in which case some of the 30% initial tax relief is effectively lost. and perhaps the rest of it is lost in management fees (both initial fees, and very high annual fees over the 5+ years you hold the VCT).

The exit NAV is normally higher than the purchase NAV and you seem to have pretended that there's nil investment gains after fees, which isn't the normal case.

grey_gym_sock

Fatbritabroad wrote: »

I rent a room which i understood is tax free (it's to a friend and is mates rates 350 a month). But this plus my bonus last year plus pension contributions definitely pushes me over 100k. Does that count even though rent a room is tax free or is that separate

"rent a room" income, when it's under the threshold, is automatically exempt, according to https://www.gov.uk/rent-room-in-your-home/the-rent-a-room-scheme or the more detailed info at https://www.gov.uk/hmrc-internal-manuals/property-income-manual/pim4001

exempt implies it's not part of your taxable income at all. (unlike taxable income which is taxed at 0% - that's what the £2k "dividend allowance" is, for instance.) so there's no problem here, i think.

grey_gym_sock

jamesd wrote: »

They offer far more tax relief than ISA or pension investing, with that 30% every five years, tax exempt dividends and no CGT.

compared to ISAs, the tax advantage of VCTs is that 30%.

The exit NAV is normally higher than the purchase NAV and you seem to have pretended that there's nil investment gains after fees, which isn't the normal case.

no: i'm assuming that all the alternatives (e.g. VCT, ISA, unwrapped) will probably give you investment gains. so it's false mental accounting to offset a loss when exiting a VCT at a discount to NAV against investment gains.

the differences between ISA and VCT are:

1) VCT gains that 30% initial relief.

2) VCT losses in probably exiting at below NAV, and in much higher initital and on-going charges, compared to an ISA.

3) the underlying investment is significantly different, VCT being in unquoted companies.

my contention is that (2) roughly cancels out (1). so the only good reason to favour VCT over ISA would be if you prefer the different underlying investment (3). which seems unlikely overall, since VCT is illiquid and (broadly speaking) higher risk. though it's possible you might want a small investment in VCT to sit alongside a much larger investment in conventional S&S (e.g. in ISAs), because that might give you some diversification.

jamesd

That 30% is once every five years vs nil for the ISA.

Your 2 assumption is nowhere near close to reality. It's commonplace for VCTs to operate a policy of buying shares at 5% or 10% below NAV. This discount policy is something to check when considering a VCT. It's 5% for my own largest holding. Total management and other costs for the six months to September 2017 were 1.2%. After costs gains for shareholders were about 1.3 times the total costs. No exits of investments and that's where significant profit can come.

For comparison here are the costs for the first five ISA-eligible micro-cap funds turned up by Google, unlike the VCT platform costs have to be added: 0.74% OCF, 1.81%, 2.81%, 1.68% and 1.59% OCF. Those before platform fee costs are mostly lower. But not close to enough lower to make your assertion accurate.

VCTs mostly do invest in unquoted companies but it's not uncommon to hold some quoted companies as well, either because an invested company wemt public or just to use otherwise uninvested money.

Since you have those inaccurate beliefs its unsurprising that you don't like the idea of VCTs. And since I own them and see the real numbers it should be unsurprising that I think they can be useful.