Useless IFA on BBC 3 Counties Radio - Translation please - "12.3K CGT allowance Wrapper"

csgohan4

Could be worse, he could be saying investing in Gold and Bit coins

solidpro

bowlhead99 said:
In future, perhaps if you hear something on a radio show and have a link to the recording, you could write down what was said and then read it.

Why on earth would I do that, when I have you?

solidpro

OK lets ask the question again, seeing as the £15k-£30k assumed pensioner who can't afford to lose it scenario is the sticking point. Let's have a little riddle:

A man (or woman) has £500k in the bank. They're not averse to some risk.
They need a product which will max out his/her £12.3k Capital Gains tax relief.
It must be in a wrapper, as described. What is it?

coyrls

Wrappers (e.g. ISA, SIPP),  protect you from Capital Gains Tax but have contribution limits.  With £500K, the capital could be moved into wrappers over a number of years.  The £500K could be invested and each year a portion could be sold that "maxed out" the Capital Gains tax relief and the resulting cash could then be placed into an appropriate wrapper to protect it from any future Capital Gains Tax.

solidpro

coyrls said:

Wrappers (e.g. ISA, SIPP),  protect you from Capital Gains Tax but have contribution limits.  With £500K, the capital could be moved into wrappers over a number of years.  The £500K could be invested and each year a portion could be sold that "maxed out" the Capital Gains tax relief and the resulting cash could then be placed into an appropriate wrapper to protect it from any future Capital Gains Tax.

Thanks - what wrapper would ever allow you to annually make £12,300 profit which would ordinarily be subject to GCT?

eskbanker

solidpro said:

A man (or woman) has £500k in the bank. They're not averse to some risk.
They need a product which will max out his/her £12.3k Capital Gains tax relief.
It must be in a wrapper, as described. What is it?

'Wrapper' isn't a particularly well-defined term, as shown in bowlhead's Google screenshot - it can be used generically to refer to any account within which to hold investments, but is more commonly used to denote specifically tax-free wrappers, such as ISAs or SIPPs, where the contents are sheltered from taxes such as income tax and CGT.

There isn't really such a thing as "a [specific] product which will max out his/her £12.3k Capital Gains tax relief" - any investments within a tax-free wrapper aren't subject to CGT, and any investments in any other type of 'wrapper' are subject to CGT (once over the allowance), but that CGT liability derives from the success of the investment rather than the choice of wrapper, so any investment that'll result in a gain of £12.3K arguably fits the bill.

However, the oft-used expression 'don't let the tax tail wag the investment dog' comes into play, in that basing an investment strategy on a fairly arbitrary CGT allowance doesn't make sense - while it's true that using tax-free wrappers is a good starting point, decisions about what to actually invest in should be driven by objectives, timescales, attitude to risk, pension provision, employment status, age, health, dependents, full asset visibility, ethical or religious considerations, etc, etc, which is obviously a process that an IFA will go through with their clients rather than trying to give a simple universal answer on a radio show without sight of all relevant personal circumstances.

If you read the numerous newbie investor threads on here you'll see that the most frequent recommendation is to start with one of the global multi-asset funds, available from various major fund managers and on all mainstream platforms - these can be calibrated to risk levels suited for most investors and offer broad diversification combined with simple 'buy and forget' operation.  That doesn't mean that they're the right answer for all though, but it's impossible to be specific and definitive in the absence of an individual's full financial circumstances.

Perhaps that all seems like Swahili to you, but maybe an analogy will work better: your riddle is much the same as walking into a car dealership and saying 'I need a car and it must be red' - it would naturally be possible for a salesperson to supply exactly what was asked for, but you'd expect them first to go through a process specific to that individual, identifying budget, size, performance requirements, etc, rather than hoping that a red Fiesta will fit the bill because it happens to be the best seller.

bowlhead99

solidpro said:

Let's have a little riddle:
A man (or woman) has £500k in the bank. They're not averse to some risk.
They need a product which will max out his/her £12.3k Capital Gains tax relief.
It must be in a wrapper, as described. What is it?

I will start from the perspective that you are asking to do something in a 'wrapper', but don't know what a 'wrapper' is.

A 'wrap platform' offers various types of investments and can offer them in different types of 'wrappers'. 'Wrapper' is just the terminology to describe the properties of the particular type of account on the platform.

For example you come back from a days shopping and in the boot of your car you have all the stuff you bought.  The shopping you have comes in different shapes and sizes and formats.  For example you have an individual piece of fruit or veg, or you have a package of fresh veg, or tin of mixed fruit or veg, or you have a whole prepared ready meal, or you have a variety pack of biscuits. Some of the things you bought are in a paper bag from the greengrocers, and some are in a plastic 'bag for life' from Tesco Extra, and some are in a 1000 denier nylon rucksack that you've been using for years, and some of the things are sitting in the corner of your boot not wrapped in anything.

The different bags as 'wrappers' for your shopping all have their own properties (are they waterproof, are they durable, are they easy to get into, are they lightweight, are they easy to carry), and some things didn't fit in to your wrappers at all so are just rolling around loose. 

In this example, the boot of your car - where the sum total of your day's shopping is sitting - is like an 'investment platform' and the bags are like 'wrappers' for the individual items of shopping you are transporting, and those individual items are like 'investments'.

An individual orange might be like an individual share in a company, a tin of peas might be like a fund that only holds one type of investment (e.g. shares from different UK companies), a tin of mixed veg might be like a fund that holds a broader variety of investments (shares from UK and international companies) and some big 'variety pack' of something or a ready-meal might be like a whole 'off the shelf' mixed asset investment fund that gives you a bit of everything.

So continuing the example an ISA, a pension, an investment bond account are all types of 'wrappers' that can hold investments. They each have different properties, like the different types of bags mentioned above. For example the ISA wrapper allows you to put in £20k per tax year and there is never any UK income tax or capital gains tax on the profits made inside the wrapper or any tax to pay when you withdraw things from it.  Whereas the pension has a different limit on what you can put in, and gives you a boost of tax relief, and you don't pay any income or gains taxes on profits made year to year, but you can't access it until a certain age, and when you take things out you may have to pay tax depending on your circumstances.

Pretty much all the wraps (like all the bags) can hold the same sort of investments (the same sort of groceries) but if you are buying lots of groceries (because you have £500k to spend on groceries) you may prefer to put certain types of groceries in certain types of bags to suit your circumstances, depending on what bags you have and what groceries you are buying, and some things you might not bother to put in bags at all.  

Some stuff in your boot doesn't sit inside a bag - perhaps because it's bulky or you are short of bag space or you can't be bothered putting it in a bag because a bag doesn't offer much of a benefit. It could therefore roll about and spill or get more easily damaged, but may not do, depending how much attention you are paying when driving. Some people might consider such items to be 'unwrapped', just like the investments that you hold outside your tax protected ISA and pension and investment bond accounts are 'unwrapped'.

However, you might prefer to think of the corner of your car where you put things that don't have any special tax protection as its being own little 'wrapper', called a general investment account. The things in it won't float away (because the boot door is closed) so they will stay in the car just like your investments will stay in the wrap platform, but there is nothing to stop them rolling around and bruising or spilling, just like there is nothing that the wrap platform is doing to stop investments in a general investment account being subject to tax. It's handy to be able to say that all your investments are in one place and all in wrappers, even if they can't all occupy the same wrappers due to lack of space and one of the wrappers (the 'general investment account') is useless at protecting against tax.

For someone with £500k then, buying a pile of investments - they could put some of their assets into an ISA and some of their assets into a pension. It wouldn't all fit, at least not all in one year, so some of it would have to sit outside those more useful 'wrappers', even if it is still held on an investment platform in a general account. Depending on your point of view, you might consider investments in a general investment account as being in a 'not tax-protected' wrapper, or not being in a wrapper at all. 

Capital gains taxes and investment income taxes are only relevant for investments that are not in 'tax-protected wrappers'. You will not use up your annual £12,300 CGT exemption with any gains made in an ISA or pension, because HMRC will not even consider those gains as being taxable. You can only use your CGT exemption by selling something that is not in a tax-protected wrapper.   

The fact that there is an exemption for the first £12300 of CGT per year means that it is not necessarily the end of the world if your assets are not all in tax-protected wrappers because you can still sell £x of unwrapped investments every year making £y of gains, with no tax to pay as long as £y remains under £12300 a year; and even if £y is over £12300, you only pay CGT on the amount that exceeds £12300, and if you have a spouse or civil partner you can transfer the assets between spouses or civil partners to make sure you make use of both of your exemptions and allowances.

solidpro said:

They need a product which will max out his/her £12.3k Capital Gains tax relief.
It must be in a wrapper, as described. What is it?

The short answer to your question of how to use £12300 of CGT exemption in a particular tax year is to hold investments in a general investment account (which does not have any special properties to protect against tax) and then sell enough of the assets to make £12300+ of gains within the tax year. 

You say 'it must be in a wrapper, as described', but you have not described any wrapper. If your £500k was all in any kind of tax-protective wrapper you would not use up any of your CGT exemption when you sold the investments for a gain.  So the only 'wrapper' you can mean is a 'general investment account'.  As mentioned earlier, sometimes people say that a general investment account on a wrap platform or fund supermarket is a 'wrapper' but it is not a very useful one; like a mesh string bag doesn't protect its contents from the elements and stop them getting wet or dirty or damaged, a general investment account holds investments together in one place but doesn't protect them from tax.

As to what the specific investment product is, that you are selling within your general investment account to make a gain and use your exemption - well, that depends what investment you bought and are now selling.  What you prefer to buy and sell or hold will depend on your goals and objectives  and what other things you already hold elsewhere.  So what you are selling to make the gain may be a Microsoft share, or a share of a global stock market index tracker fund, or an actively managed 'emerging markets' fund, or a bond fund, or real estate investment trust, or a packaged 'mixed asset fund' which in turn invests into other funds from different fund managers, etc. It could be an investment property, it could be an antique vase. Generally if you had invested into it following the advice of an IFA it is more likely to be a financial asset rather than a collectible or a property ; and it's more likely to be an investment fund than a share of an individual company like Microsoft. 

dunstonh

solidpro said:

coyrls said:

Wrappers (e.g. ISA, SIPP),  protect you from Capital Gains Tax but have contribution limits.  With £500K, the capital could be moved into wrappers over a number of years.  The £500K could be invested and each year a portion could be sold that "maxed out" the Capital Gains tax relief and the resulting cash could then be placed into an appropriate wrapper to protect it from any future Capital Gains Tax.

Thanks - what wrapper would ever allow you to annually make £12,300 profit which would ordinarily be subject to GCT?

Unwrapped holdings in a General Investment Account with annual sales to realise the CGT allowance.  Bed & ISA and Bed & Pension could be used.  As could an investment bond potentially (but unlikely).

solidpro

So the IFA is invited on a radio show and he knows at least one thing for sure - He knows the topic is there are trillions of pounds sitting in UK bank accounts, held by savers who are essentially losing money due to inflation and can guess (as everyone here has assumed) another. If the posts in this forum are anything to go by we can also assume that he can guess that as this is mid-morning, home counties pensioner fodder, the audience isn’t likely to be sitting on huge wealth or be particularly drawn to high risk investments.

 

On this basis) and with the benefit of some planning (although we never know, this IFA could frequently do no planning whatsoever!), he decides to kick off by talking about making the most of your capital gains tax allowance by using wrappers alongside other wrappers to gradually (due to annual limitations of investment) fill up that CGT allowance and invest the profits into other wrappers which avoid any other CGT. This is not only Swahili, but it’s useless. Spends the rest of his segment laughing off cash ISAs, wine, whatever.

 

If I was an IFA (and I am not). If I was invited onto a show with the topic of high street savings account being a bad idea for an audience of pensioners who were risk averse, I’d probably plan to talk about:

 

1)      Finding and using deals with Challenger Banks you may never have heard of but are completely safe and, if you have the time, you can find an angle.

2)      Using savings to top up a pension I can access now or very soon, because the government will instantly bump up my contributions with generous ‘free’ money.

3)      Consider using one of the big, well reviewed firms which allow you to access a investing in equity with the benefits of a fund manager, highly simplified risk management (0/20/40/60/80/100 high risk) but without the need for an IFA which isn’t interested in me anyway.

4)      Consider NS&I PB as being the same as 0% interest high street savings but having the benefit of feeling ‘in it to win it’ which is more enjoyable than not expecting to win anything ever.

 

If he did make any of these points, he might as well have said them in Swahili because if we have determined upon multiple listens that he did mention them, it was either lost in translation or he didn't make any of the useful stuff stand out from the pointless stuff.

If I can make those points whilst having absolutely nothing to do with personal finance then I would make the argument that IFAs get enough stick as it is. This guy on the radio yesterday made it worse.

solidpro

eskbanker said:

There isn't really such a thing as "a [specific] product which will max out his/her £12.3k Capital Gains tax relief" - any investments within a tax-free wrapper aren't subject to CGT, and any investments in any other type of 'wrapper' are subject to CGT (once over the allowance), 

So would you agree that the way the IFA on the radio described it, I would need a wrapper (commonly assumed as shorthand for 'tax free wrapper') which has nothing to do with CGT to save money ordinarily being used to pay CGT?