Will the second LTA test even be there in 17 years time??

jamesd

John467 wrote: »

Thats clever (I think). Does that mean say if you draw out £50k to reduce the balance, and have to pay tax on it at 40% (if drawn early) or 55% if taken as a lump, that tax can be mitigated by investing the £50k in Venture Capital Trusts? I did a quick google and I understand that would get 30% tax relief, so you only pay 10%-25% net. Is that what you mean?

VCT buying pays 30% relief capped at the income tax bill you'd otherwise have for the tax year.

Say at 58 you take benefits from all of the money and use 100% of the lifetime allowance. Say also that you'd see growth on a half million pot of 646k over 17 years - 6% compounded. Take none out and at 75 you'd have to pay LTA charge on the 646k increase.

You can avoid that by taking out the growth. If it's a level 6% that would mean drawing 0.06 * 500k = 30k of taxable money a year.

If I pretend that the DB taxable income is 20k a year that's 50k taxable. 12.5k personal allowance and 37.5k taxed at 20%. So 37.5 * 0.2 = 7.4k tax due. Say you buy 7.4 / 0.3 = 24666 of VCTs. Tax relief is 30% of that, covering the 7.4k bar a few pence, so no net income tax bill. In practice you tend to have to buy VCTs in 1k increments so you'd buy 24k and pay a little tax or 25k and get no VCT relief on the final 334 bit.

Say just basic rate isn't enough. Maybe the DB is higher or growth is, or you reach state pension age. Or you want to get ahead. So you draw 60k. Now you have the 7.4k of basic rate plus 0.4 * 30k = 7.4k + 12k. VCT buy needed is now 19.2k / 0.3 = 64k. 64k * 0.3 = 19.2k.

VCT dividends are tax exempt. If you sell within 5 years you have to repay the 30% relief, after that you don't, so the money is locked away for 5 years in effect.

What you might do is draw at the partial higher rate level for a few years, enough so you can be confident that once your state pension starts you'll be able to do it all at basic rate. After a while the five year lock in will be over for most of the money. And no age 75 LTA charge because you arranged for the pot to be the same size or smaller.

OldBeanz

While pensions are shelters from inheritance tax then the Government is likely to want some sort of cap on the amount that can be protected. Millionaires are easy targets for some parliamentarians whose plans need shed loads of cash.

John467

jamesd wrote: »

VCT buying pays 30% relief capped at the income tax bill you'd otherwise have for the tax year.

Say at 58 you take benefits from all of the money and use 100% of the lifetime allowance. Say also that you'd see growth on a half million pot of 646k over 17 years - 6% compounded. Take none out and at 75 you'd have to pay LTA charge on the 646k increase.

You can avoid that by taking out the growth. If it's a level 6% that would mean drawing 0.06 * 500k = 30k of taxable money a year.

If I pretend that the DB taxable income is 20k a year that's 50k taxable. 12.5k personal allowance and 37.5k taxed at 20%. So 37.5 * 0.2 = 7.4k tax due. Say you buy 7.4 / 0.3 = 24666 of VCTs. Tax relief is 30% of that, covering the 7.4k bar a few pence, so no net income tax bill. In practice you tend to have to buy VCTs in 1k increments so you'd buy 24k and pay a little tax or 25k and get no VCT relief on the final 334 bit.

Say just basic rate isn't enough. Maybe the DB is higher or growth is, or you reach state pension age. Or you want to get ahead. So you draw 60k. Now you have the 7.4k of basic rate plus 0.4 * 30k = 7.4k + 12k. VCT buy needed is now 19.2k / 0.3 = 64k. 64k * 0.3 = 19.2k.

VCT dividends are tax exempt. If you sell within 5 years you have to repay the 30% relief, after that you don't, so the money is locked away for 5 years in effect.

What you might do is draw at the partial higher rate level for a few years, enough so you can be confident that once your state pension starts you'll be able to do it all at basic rate. After a while the five year lock in will be over for most of the money. And no age 75 LTA charge because you arranged for the pot to be the same size or smaller.

Thank you for taking the time to explain that jamesd, it is much appreciated. It does indeed make a lot of sense. I had been vaguely aware of VCTs but not considered them in this context before.


Although a high risk investment, in the context of a broad and generally low risk portfolio, then using the higher risk investments to minimise tax fits very nicely.


Thank you.

jamesd

It's also worth knowing that VCT risk levels vary a lot.

At the lower end are those that have lots of existing asset backed investments. Next are the ones that do late stage funding. At the opposite end are highly speculative biotechnology firms. You can pick your desired risk level within these.

You can't get much lower risk than UK stock market level, arguably where the asset backed ones might fit, and other than those they are at least as risky as a small cap or micro-cap fund, with the higher risk end substantially beyond that.

ffacoffipawb

jamesd wrote: »

It's also worth knowing that VCT risk levels vary a lot.

At the lower end are those that have lots of existing asset backed investments. Next are the ones that do late stage funding. At the opposite end are highly speculative biotechnology firms. You can pick your desired risk level within these.

You can't get much lower risk than UK stock market level, arguably where the asset backed ones might fit, and other than those they are at least as risky as a small cap or micro-cap fund, with the higher risk end substantially beyond that.

Can you suggest some low risk ones for me please, thanks.

jamesd

ffacoffipawb wrote: »

Can you suggest some low risk ones for me please, thanks.

None are low risk.

Relatively low compared to others might include the still mostly asset backed Albion (AAVC ticker) and perhaps Albion Enterprise (AAEV) or Albion Development (AADV). You might find the commentary here on Albion VCTs of interest.

For more general VCT commentary try The Lemon Fool.

ffacoffipawb

jamesd wrote: »

None are low risk.

Relatively low compared to others might include the still mostly asset backed Albion (AAVC ticker) and perhaps Albion Enterprise (AAEV) or Albion Development (AADV). You might find the commentary here on Albion VCTs of interest.

For more general VCT commentary try The Lemon Fool.

There are only 5 or 6 VCT available on https://www.hl.co.uk and none of them are Albion. You have to buy at issue to get tax relief I believe. Buying on the market doesnt get you tax relief I dont think?

https://www.hl.co.uk/investment-services/venture-capital-trusts

You must hold the shares for five years to keep the tax rebate. The rebate is only available when you invest in a new issue of shares in a VCT or a top-up, not on any VCTs you buy on the open market. However, VCTs bought on the secondary market count towards the £200,000 allowance for the tax year in which you buy them, despite the fact you don't get the income tax break.

Thanka

jamesd

Right on the 30% relief. VCT season tends to start around October and November and that's when there's most choice and when the most in demand ones tend to fully sell.

Purchasers on the stock market still get tax exempt dividends and lack of CGT.

chucknorris

jamesd wrote: »

Right on the 30% relief. VCT season tends to start around October and November and that's when there's most choice and when the most in demand ones tend to fully sell.

Purchasers on the stock market still get tax exempt dividends and lack of CGT.

Have you invested much (I mean % of your portfolio) in VCT's James? If so, what is your strategy?

jamesd

About 9% of my total investments are in VCTs, limited in part because I've been a very high user of pension salary sacrifice. About 5.5% is in AAVC and that shouldn't surprise anyone who's read my posts over the years.

For AAVC the current value is about 43% above my after tax relief purchase cost and I've so far received an additional 32% of that cost in dividends. 100 / 70 = 1.429 so if there were no purchase costs the initial tax relief would be expected to produce a gain of 42.9% on the after relief cost. As anticipated most of the non-relief returns for this VCT have been via the dividends, not capital value increases. The current dividend rate is 10% of my after relief purchase cost a year. My purchases were in two consecutive tax years.

I anticipate adding around 4% this tax year and similar for a few more years as I use the basic rate band to move money rapidly out of pension pots to the point where I'll expect to remove the rest before and after state pension age within the income tax personal allowance. This move is:

1. to increase flexibility of investing, including making almost all of the capital available without high tax costs once the VCT holding time is over. I might use this flexibility beyond just possibly repaying a 10% of investments interest only mortgage around its end day
2. to lower costs, drawdown inside a pension tends to be a bit higher cost than ISA or other outside
3. so that all or almost all of my income becomes free of tax for the rest of my life, wrapped initially in pension then VCT and on to ISA or other.
4. long term I anticipate higher income tax beyond what the Scottish government has done, so prefer to move into untaxed wrappers at current income tax rates, offset by the VCT buying
5. incidentally eliminating the chance of a pension lifetime allowance charge

Within VCTs I intend to continue increasing diversification mainly in the generalist type. I like AAVC and it's been delivering as anticipated but diversification is a necessary risk management tool.

Expect me to execute on the relevant to me optimisation strategies I've been writing about over the years: I am.