Stop paying tax and retire at 56?

Steve182

Or hardly ever pay tax, well that's my plan, if it works.

53YO, hoping to retire at 56.

My investments comprise of equities held mainly in SIPPs and ISAs of which the bulk are in my name but some are owned by my wife, mainly from money I gifted her.

I also have shares in my own (private) company which cannot be put in a tax shelter, and some VCTs

Currently I'm salary sacrificing into SIPP to keep taxable earnings to £50K, so my income tax is £7.5K

My tax would normally be higher than this because of 32.5% divi tax on my company shares.

The plan moving forward from FY2022-23 onwards -

FY2022-23

Invest all dividends from my own company into VCTs. The 30% income tax relief will, to within a couple of percent completely offset the 32.5% divi tax. 

With my salary sacrifice and divi's fully invested I will not have capacity to save or invest more money, but I could consider moving £25K from ISAs and invest in VCT's which would fully offset my £7.5K PAYE tax bill.

FY2023-24

As above, salary sacrifice into SIPP and fully invest all dividends from my own company into VCTs to offset tax.

Additionally -

Take TFLS from one of my SIPPs (without triggering MPAA).  This would occur in Q1 2024 when I reach 55. This will help avoid exceeding the LTA in future. Invest TFLS as follows -

Reinvest some in my ISA
Gift some to my OH for her ISA/SIPP
Invest £25K into VCTs to fully offset my £7.5K PAYE tax bill

FY2024-2025 (more of the same)

Salary sacrifice into SIPP and fully invest all dividends from my own company into VCTs to offset tax.

Reinvest some more TFLS in my ISA
Gift some more TFLS to my OH for her ISA/SIPP
Invest £25K from TFLS into VCTs to fully offset my £7.5K PAYE tax bill

FY2025-2026 - Retirement!!!

I need to sell my company shares when I resign as a director.  These will give me 2 year cash reserve and should only attract 10% CGT (entrepreneurs rate).
 
Draw down £50K (taxable) from same SIPP as the TFLS was taken from. Cash not needed but want to avoid LTA. Anything above what I need to live on will be reinvested in tax shelters.

Buy sufficient VCT's (about £50K's worth) to offset tax from both the above transactions

2026 onwards -

Take TFLS from other SIPP as and when capacity exists in our ISAs or my wife's SIPP to absorb them to shelter from LTA

Continue drawing £50K PA (taxable) from SIPPs indefinitely and move surplus cash to other tax shelters, or until I'm sure I've done enough to prevent LTA being exceeded at the second checkpoint (age 75). At the same time aim to invest sufficient amounts annually in VCTs to offset all tax, which would be £25K VCT investment based on £7.5K tax liability from the £50K drawdown @ 20% basic rate.

Existing VCT investments would be reviewed annually and may be sold after 5 years (minimum holding period to qualify for tax relief) should the total invested in VCT's exceed about 20% of the portfolio.

Below is what the portfolio might look like after retirement, which would give me 4 to 5 years reserve in cash and bonds in case of stock market downturn. 

8% CASH

8% BONDS

20% IN VCTs

20% INDIVIDUAL COMPANY SHARES (I need an interest)

44% IT's/FUNDS The more successful VCT's such as Northern and Mobeus aim to pay at least 5% divis tax free (not guaranteed). Of late they have averaged closer to 10% but my maths is always based on a maximum of 5. Expecting (hoping) joint investment pot (wife and I) to reach circa £1.25M ball park when I reach 56, of which about 60% will be in my SIPPs so anxious to draw them down a fair bit as LTA is a very soft target for the chancellor and may never budge above £1.073M There will be some mortgage left when I reach my proposed retirement age but expect to have money to one side to clear it should I see fit. Looking for £50K PA household income in retirement, inflation linked and net after tax, but with my plan we will not really pay any tax. Wife likely to continue working part time earning at least £12K PA for the next 5 years minimum, and working to  some degree to get her stamp right up to SP age. We'll both be entitled to full SP's, mine at age 67, my wife at 68 (in 18 years). I'll need to draw around 3% PA from the pot to achieve this which I'm comfortable with.  Likely to receive significant inheritance in 5 to 15 years but not factored this in. Care homes tend to eat houses! I have quite a high risk tolerance. I'll not de-risk (move out of equities) until I get close to my target. If there is a market downturn and I need to work a couple of years longer, so be it. Thoughts/comments/sanity check of my plan would be greatly appreciated

Dazed_and_C0nfused

FY2025-2026 - Retirement!!!

I need to sell my company shares when I resign as a director.  These will give me 2 year cash reserve and should only attract 10% CGT (entrepreneurs rate).

Draw down £50K (taxable) from same SIPP as the TFLS was taken from. Cash not needed but want to avoid LTA. Anything above what I need to live on will be reinvested in tax shelters.

Buy sufficient VCT's (about £50K's worth) to offset tax from both the above transactions

Are you sure VCT relief will actually reduce the CGT liability?

Alexland

Steve182 said:

Currently I'm salary sacrificing into SIPP to keep taxable earnings to £50K, so my income tax is £7.5K
...
I could consider moving £25K from ISAs and invest in VCT's which would fully offset my £7.5K PAYE tax bill.

I just started doing this (already lumpy sal sac down to around £49k) and in December put £23k into a VCT to get £6,900 income tax back next tax year so over a 5 year cycle it will tie up just over £80k of our ISA money into VCTs although as I will be reinvesting the dividends into new lump sum purchases more like £60-65k of current ISA money into VCTs. The benefit will be somewhat eroded by the higher charges and eventually selling at a discount.

I started with Baronsmead as it's a high and early dividend payer and well diversified with a high proportion of legacy portfolio to help fund the VCT purchases from dividends in future years. I might start buying more growth focused VCTs in future tax years especially if the valuations in that part of the market start looking more attractive although as pension allowances are frozen there might be more people looking into VCTs causing too much VC money to be chasing too few good investments. The only caveat to that is I don't really want to sell down units from our S&S ISAs if market valuations are low so I might skip tax years when I can't see a good exit point on our ISAs aligning with a good offer being available on the VCT side.

For my first purchase I used Wealth Club who make their money on the trail commission (which they only rebate a tiny proportion) however for that sort of regular purchase value it would be cheaper after a couple of years to pay the Interactive Investor ongoing GIA/ISA account fee and £30 per purchase to get all of the trail commission rebated. Still you need to be fast with some VCTs as they fill quickly and the II process looks slow.

If you are interested in VCTs the Lemon Fool forum is good:

https://www.lemonfool.co.uk/viewforum.php?f=25

Thrugelmir

There's many reasons to tread carefully with VCT's.  The discussions follow the same path as there were when P2P was the fad.  There's much naivety in the comments made. 

Alexland

Thrugelmir said:

There's much naivety in the comments made. 

Was this a general derogatory remark or is there anything in the above posts you have specific issue with?

Thrugelmir

Alexland said:

Thrugelmir said:

There's much naivety in the comments made. 

Was this a general derogatory remark or is there anything in the above posts you have specific issue with?

Sometimes it's possible to make observations using ones own personal lifetime of experience. Being on the inside is so very different to that of looking in from afar. 

Steve182

Dazed_and_C0nfused said:

FY2025-2026 - Retirement!!!

I need to sell my company shares when I resign as a director.  These will give me 2 year cash reserve and should only attract 10% CGT (entrepreneurs rate).

Draw down £50K (taxable) from same SIPP as the TFLS was taken from. Cash not needed but want to avoid LTA. Anything above what I need to live on will be reinvested in tax shelters.

Buy sufficient VCT's (about £50K's worth) to offset tax from both the above transactions

Are you sure VCT relief will actually reduce the CGT liability?

Good point. I just checked HMRC website and for VCTs it clearly states "income tax relief" so I guess CGT is some tax I cannot avoid. I think that exemption will also apply to my company share dividend tax too, so I must limit VCT buying to £25K/year with a £50K taxable income.

Steve182

Alexland said:

Steve182 said:

Currently I'm salary sacrificing into SIPP to keep taxable earnings to £50K, so my income tax is £7.5K
...
I could consider moving £25K from ISAs and invest in VCT's which would fully offset my £7.5K PAYE tax bill.

I just started doing this (already lumpy sal sac down to around £49k) and in December put £23k into a VCT to get £6,900 income tax back next tax year so over a 5 year cycle it will tie up just over £80k of our ISA money into VCTs although as I will be reinvesting the dividends into new lump sum purchases more like £60-65k of current ISA money into VCTs. The benefit will be somewhat eroded by the higher charges and eventually selling at a discount.

I started with Baronsmead as it's a high and early dividend payer and well diversified with a high proportion of legacy portfolio to help fund the VCT purchases from dividends in future years. I might start buying more growth focused VCTs in future tax years especially if the valuations in that part of the market start looking more attractive although as pension allowances are frozen there might be more people looking into VCTs causing too much VC money to be chasing too few good investments. The only caveat to that is I don't really want to sell down units from our S&S ISAs if market valuations are low so I might skip tax years when I can't see a good exit point on our ISAs aligning with a good offer being available on the VCT side.

For my first purchase I used Wealth Club who make their money on the trail commission (which they only rebate a tiny proportion) however for that sort of regular purchase value it would be cheaper after a couple of years to pay the Interactive Investor ongoing GIA/ISA account fee and £30 per purchase to get all of the trail commission rebated. Still you need to be fast with some VCTs as they fill quickly and the II process looks slow.

If you are interested in VCTs the Lemon Fool forum is good:

https://www.lemonfool.co.uk/viewforum.php?f=25

Thanks for the reply. I've used Wealthclub for my last 2 VCT investments and they are fast.

I think I managed to get some Mobeus with them last week, the offer opened around noon on 20th, I applied that evening then it closed at 10:30AM on 21st. I'm awaiting confirmation as to whether I was successful. Now kicking myself for not making more cash available for Mobeus.

Northern and Amati AIM VCT sold out fast too as I seem to recall.

I guess my VCT buying will be somewhat less than I had originally planned since Dazed & Confused correctly questioned whether the relief applied to CGT (and even more relevant to me, divi tax) 

I'll check out Lemonfool

Alexland

Steve182 said:

I think I managed to get some Mobeus with them last week, the offer opened around noon on 20th, I applied that evening then it closed at 10:30AM on 21st. I'm awaiting confirmation as to whether I was successful. Now kicking myself for not making more cash available for Mobeus.

I'm surprised at the excitement for Mobeus this year as from what I understand the management is going to be merged in with the Livingbridge team that moved to Gresham House and both your Mobeus and my Baronsmead will be sharing new deal flow going forwards? Are people just buying on past performance. It's not really clear how individual VCTs are going to perform going forwards given the recent changes to qualifying new investment criteria.

Steve182

Alexland said:

Steve182 said:

I think I managed to get some Mobeus with them last week, the offer opened around noon on 20th, I applied that evening then it closed at 10:30AM on 21st. I'm awaiting confirmation as to whether I was successful. Now kicking myself for not making more cash available for Mobeus.

I'm surprised at the excitement for Mobeus this year as from what I understand the management is going to be merged in with the Livingbridge team that moved to Gresham House and both your Mobeus and my Baronsmead will be sharing new deal flow going forwards? Are people just buying on past performance. It's not really clear how individual VCTs are going to perform going forwards given the recent changes to qualifying new investment criteria.

Yes they are merging as you point out

"In September 2021, Mobeus Equity Partners sold its VCT business to Gresham House plc, an AIM-quoted specialist alternative asset manager that also manages the Baronsmead VCTs. As part of the deal the Mobeus VCT team, including partners Trevor Hope and Clive Austin, 14 staff and three consultants, transferred to Gresham House."

Given that it sold out in less than 24 hours there clearly is an expectation that it will continue to outperform.... 

Alexland

Steve182 said:

Given that it sold out in less than 24 hours there clearly is an expectation that it will continue to outperform.... 

With what's going on in the broader markets and economy at the moment I'm starting to see recent high performance as a sign of potential underperformance going forwards which is pushing me towards the more diversified mid-performers. My VCT purchase this year has been testing the water and I'm not yet sure I want to go all the way into building a 5 year 'VCT ladder' so I will judge what to do each tax year on the opportunity at the time however this month my VCT sell price has gone up closer to my buy price compared to my various global tracker collection down nearly 10% so I guess it will provide both income and portfolio diversification benefits.