A couple of ISA-related questions.

Albermarle

OldBill said:

Pension - I have very recently retired and am in receipt of a Defined Benefit public sector pension.

My ISA / GIA money is invested in equity funds (70%) & bond funds (30%) spread between the 2 accounts. I hadn't thought about savings accounts as the interest rates are so abysmal.

I am no investment expert, but there have been numerous discussions on this forum about the poor outlook for bonds .
The price of bonds has been pumped up by QE( printing money) since the 2008 financial crash, and secondly bond prices are vulnerable to rises in interest rates /inflation.
Savings rates are not great but they are at least positive ( around 1.5% for a two year fix ) and most bond funds are showing a small  loss this year , although this will vary a lot depending on what bonds are involved.

OldBill

MX5huggy said:

Firstly don’t worry, take a breath. It sounds like you are the executor of the will and the person was close as you are paying for the funeral so give yourself some time. 

Have the inheritance deposited in a bank account may be move it to a best paying instant access savings account. Then comeback to it with fresh eyes. Delaying 4 weeks might just be the 4 weeks when markets drop 40%. 

What are your investment goals? Could a pension be used to meet these? Do you have a partner that you have shared goals with who’s ISA, Pension and GIA allowances available? 

You only pay CGT when you sell something for a profit so if you did invest using GIA there is no CGT to pay until you sell but you want to use your allowance by selling (even if you buy something very similar the same day, say VWRL and buy FTSE Global All Cap). 

Yes, I am the executor of the will and the person who died was a close relation.  Thank you for your kind perception.

And yes, my intention was and is to initially get all of the inheritance funds together in a bank account, though I didn't really consider an instant access savings account because (again) the interest rates are so low, and to get a half-decent rate would mean tying them up for 2 years.

Investment goals - I do not have a partner, or children, or dependants.  My "goals" were simply to make the money I had inherited to work hardest (hence the GIA), but without being hammered for CGT, & to keep feeding my ISA.  (I am presuming that it is ALWAYS a good thing to max out on an S&S ISA).

I understand that there is no CGT to pay until assets are sold, but I am not sure I understand it when you say "you want to use your allowance by selling (even if you buy something very similar the same day, say VWRL and buy FTSE Global All Cap)."  

The £12,300 figure is confusing me: is that the amount that can be withdrawn from  a GIA tax-free, anything above which is taxed? In which case, it would be unwise to have a balance of more than about £130,000-£150,000, unless, of course, I was prepared to pay some CGT. I'm worried about miscalculating and being hit with a big tax bill.

I must say, Albermarle's suggestion NOT to chuck all of the inheritance into a GIA, just maybe Equity funds, and then balance that out with cash deposits in savings accounts, looks attractive - especially if it sidesteps the CGT problem, me getting the calculations wrong and being clobbered with tax.

Albermarle

The £12,300 figure is confusing me: is that the amount that can be withdrawn from  a GIA tax-free, anything above which is taxed? In which case, it would be unwise to have a balance of more than about £130,000-£150,000, unless, of course, I was prepared to pay some CGT. I'm worried about miscalculating and being hit with a big tax bill.

It is the amount of profit you make selling investments . If that profit is higher in any tax year then you pay tax on the excess. Whether you withdraw it or not is not relevant. 

Do not forget that there is also a limit on how much in dividends you can be paid each tax year , before you start paying tax - £2000.

I have seen comments on this forum that if managed correctly and assuming no stellar returns , then it should be possible to manage a six figure GIA account without paying any tax , 

I must say, Albermarle's suggestion NOT to chuck all of the inheritance into a GIA, just maybe Equity funds, and then balance that out with cash deposits in savings accounts, looks attractive - especially if it sidesteps the CGT problem, me getting the calculations wrong and being clobbered with tax.

A saying often repeated on here is 'do not let the tax tail wag the investment dog' . It means your investment plan /asset allocation should come first, and then minimising tax after that .

In this case it would mean that you should only change from a equity/bonds portfolio to a equity/cash portfolio ( or something inbetween ) if you think that is correct from an investing point of view. In other words that you believe that the naysayers about bonds are correct. You should not change your investment strategy just to avoid tax as the prime reason.

In any case your equity investments will probably be the main issue with CGT and dividend tax , whichever way you do it .

Also do not forget a big drop in the markets will solve your CGT problems overnight !

OldBill

"It is the amount of profit you make selling investments . If that profit is higher in any tax year then you pay tax on the excess. Whether you withdraw it or not is not relevant."
 - So if you sold investments, and made more than £12,300 profit on them, you would pay tax on the excess, even if you did not withdraw it?  Even if you used the excess to purchase other assets?  (I was thinking about selling specifically to withdraw, though).

"I have seen comments on this forum that if managed correctly and assuming no stellar returns , then it should be possible to manage a six figure GIA account without paying any tax."  
 - You'd have to be far more literate financially than myself to do that.  I envy anyone that could do that.

"A saying often repeated on here is 'do not let the tax tail wag the investment dog' . It means your investment plan /asset allocation should come first, and then minimising tax after that . . . . You should not change your investment strategy just to avoid tax as the prime reason." 
 - Isn't that just kicking the tax can down the road? Do tax considerations really not inform every stage of people's investing strategy to a large extent?

I have to say that I am grateful for the comments made so far - but I'm going right off of the idea of a GIA at all.  Maybe I should just stick to a cash account and bunging £20,000 in an S&S ISA at the start of each tax year.

RacingDriver

"It is the amount of profit you make selling investments . If that profit is higher in any tax year then you pay tax on the excess. Whether you withdraw it or not is not relevant."
 - So if you sold investments, and made more than £12,300 profit on them, you would pay tax on the excess, even if you did not withdraw it?  Even if you used the excess to purchase other assets?  (I was thinking about selling specifically to withdraw, though).

Yes the gain is caused by selling the investment, not by withdrawing the cash.

Albermarle

OldBill said:

"It is the amount of profit you make selling investments . If that profit is higher in any tax year then you pay tax on the excess. Whether you withdraw it or not is not relevant."
 - So if you sold investments, and made more than £12,300 profit on them, you would pay tax on the excess, even if you did not withdraw it?  Even if you used the excess to purchase other assets?  (I was thinking about selling specifically to withdraw, though).

"I have seen comments on this forum that if managed correctly and assuming no stellar returns , then it should be possible to manage a six figure GIA account without paying any tax."  
 - You'd have to be far more literate financially than myself to do that.  I envy anyone that could do that.
I am doing my best to avoid having any investments outside pension or ISA, for the same reason . You have to keep detailed records , just like being at work !

"A saying often repeated on here is 'do not let the tax tail wag the investment dog' . It means your investment plan /asset allocation should come first, and then minimising tax after that . . . . You should not change your investment strategy just to avoid tax as the prime reason." 
 - Isn't that just kicking the tax can down the road? Do tax considerations really not inform every stage of people's investing strategy to a large extent?
Of course tax considerations are very important but they should be just part of a strategy . Better that your investments grow 20% and you pay half in tax , than they do not grow at all .( just a crude example ) 

I have to say that I am grateful for the comments made so far - but I'm going right off of the idea of a GIA at all.  Maybe I should just stick to a cash account and bunging £20,000 in an S&S ISA at the start of each tax year.
It is potentially a plan . If the markets have a rough time in the next few years it might prove to be a good plan .

Also you could increase your spending now you have 'come into money' .

OldBill

RacingDriver said:

"It is the amount of profit you make selling investments . If that profit is higher in any tax year then you pay tax on the excess. Whether you withdraw it or not is not relevant."
 - So if you sold investments, and made more than £12,300 profit on them, you would pay tax on the excess, even if you did not withdraw it?  Even if you used the excess to purchase other assets?  (I was thinking about selling specifically to withdraw, though).

Yes the gain is caused by selling the investment, not by withdrawing the cash.

So if you had (say) £200,000 in a GIA for 12 months, and that had produced (say) £16,000-worth of profit,and you wanted to withdraw all £16,000, the first £12,300 of that profit would be tax-free, but the remaining £3,700 would be subject to CGT at 10% (assuming you were a normal rate taxpayer). So you would net £12,300 + £3,330 = £15,630. Is that right? Where does the £2,000 dividend tax-limit come in here, if it comes in at all?  Is that an additional scalp?!

I apologise for banging on about this, I just want to get my head around it.

eskbanker

OldBill said:
So if you had (say) £200,000 in a GIA for 12 months, and that had produced (say) £16,000-worth of profit,and you wanted to withdraw all £16,000, the first £12,300 of that profit would be tax-free, but the remaining £3,700 would be subject to CGT at 10% (assuming you were a normal rate taxpayer). So you would net £12,300 + £3,330 = £15,630. Is that right?

You can't really withdraw the £16K profit as such - if your £200K had achieved an 8% gain then if you sold £16K, only £1,280 (8%) of that would be profit, and so well within the CGT threshold.

OldBill said:
Where does the £2,000 dividend tax-limit come in here, if it comes in at all?  Is that an additional scalp?!

Unlike CGT on gains crystallised only on disposal, dividends are income and are subject to income tax every year, but the first £2K of your dividends are taxed at 0%.

OldBill

eskbanker said:

OldBill said:
So if you had (say) £200,000 in a GIA for 12 months, and that had produced (say) £16,000-worth of profit,and you wanted to withdraw all £16,000, the first £12,300 of that profit would be tax-free, but the remaining £3,700 would be subject to CGT at 10% (assuming you were a normal rate taxpayer). So you would net £12,300 + £3,330 = £15,630. Is that right?

You can't really withdraw the £16K profit as such - if your £200K had achieved an 8% gain then if you sold £16K, only £1,280 (8%) of that would be profit, and so well within the CGT threshold.

OldBill said:
Where does the £2,000 dividend tax-limit come in here, if it comes in at all?  Is that an additional scalp?!

Unlike CGT on gains crystallised only on disposal, dividends are income and are subject to income tax every year, but the first £2K of your dividends are taxed at 0%.

Now I really do feel stupid, as I have completely misunderstood, and still do not understand, what is taxed and why.  I was thinking that the £16K was profit, but from what you say it is not; only 8% of the 8% gain is.  

I understand even less what commentators mean when they talk about "making the most of the Annual Exempt Amount", "taking full advantage of the £12,300 Allowance so as not to risk a larger CGT bill in the future", and the wisdom of "taking profits before the gain is too big".  You'd have to have an awful lot more than I have to get anywhere near hitting the £12,300 profit mark (I think).

RacingDriver

Maybe it would help to think it terms of number of shares/units of a fund rather than £ terms.

If you buy 500 shares at £1 each then you have invested £500.

If these shares then increase to £5 each then you investment is now worth £2,500 (500 shares at £5).

If you then withdrew £1,000 then you would be withdrawing 40% of your investment (£1,000 / £2,500) and this would mean selling 200 shares (40% of 500 shares is 200).  Therefore the gain would be the number of shares (200) times the gain (£5 sale price - £1 purchase price = £4 capital gain) = £800 capital gain.