Minimising capital gains tax

aroominyork

I’ll soon receive a large sum (an inheritance) which will take several years to feed into my and OH’s SIPPs and ISAs so I need to learn how to minimise capital gains tax. The two things which come to mind are i) hold equities in SIPP/ISA accounts and bonds in non-wrapped trading accounts; ii) sell enough each year to take up the CGT allowance, either moving it into a similar fund (avoid matching) or swapping it for 30+ days with a fund held in a wrapped account.

I am interested by Vanguard advising “Gains and losses realised in the same tax year have to be offset against each other, which can reduce the amount of gain subject to tax.” So if one fund gains £24k in a year and another loses £12k, if I sell both do I pay no CGT?

Also from Vanguard, “If your losses exceed your gains, you can carry them forward to offset against gains in the future, provided you have registered these losses with HMRC.” Suddenly I think I’ll be reporting like Donald Trump…!

I’m sure it’s been written about thousands of times so signposting to the best guides would be welcome.

Thrugelmir

To minimise your CGT liability you first need to make the gains. Putting the cart before the horse possibly. 

aroominyork

Thrugelmir said:

To minimise your CGT liability you first need to make the gains. Putting the cart before the horse possibly. 

Or possibly not since you do not know my circumstances, or my preference to know how to plan if gains are made.

EthicsGradient

aroominyork said:

I’ll soon receive a large sum (an inheritance) which will take several years to feed into my and OH’s SIPPs and ISAs so I need to learn how to minimise capital gains tax. The two things which come to mind are i) hold equities in SIPP/ISA accounts and bonds in non-wrapped trading accounts; ii) sell enough each year to take up the CGT allowance, either moving it into a similar fund (avoid matching) or swapping it for 30+ days with a fund held in a wrapped account.

I am interested by Vanguard advising “Gains and losses realised in the same tax year have to be offset against each other, which can reduce the amount of gain subject to tax.” So if one fund gains £24k in a year and another loses £12k, if I sell both do I pay no CGT?

Also from Vanguard, “If your losses exceed your gains, you can carry them forward to offset against gains in the future, provided you have registered these losses with HMRC.” Suddenly I think I’ll be reporting like Donald Trump…!

I’m sure it’s been written about thousands of times so signposting to the best guides would be welcome.

With an OH, one of you can sell an asset, and the other buy it at once, and you won't need to wait 30 days. And they could sell something else, and you buy it, to get the necessary funds. Or you can sell fund A outside a wrapper, and buy B; and sell B in the wrapper and buy A there. How long you're out of the market just depends on your broker's requirements for cleared funds.

Bond income (including from funds with over 60% invested in bonds) counts as interest income, so it, with any interest from savings accounts, has a £1000 (basic rate payer)/£500 (higher rates) zero-rate tax band. So if you plan to have a lot of bonds/bond funds, you could end up above that, at 20%/40%/45% tax, when dividends attract a lower rate. So holding bonds non-wrapped is not always the best idea.

Yes, if you sold 2 assets, and made a gain of £24k on one and a loss of £12k on the other, you'd owe no CGT for them (if they're the only assets you sold, of course). If you make a self-assessment return you still have to give the details in this case - you have to report all your gains and losses if the gross gains add up above the allowance, or the gross proceeds are above 4 times the allowance.

Yes, if you make a net loss, you can carry it forward; but you can't split your losses into "enough to get me below this year's allowance, and I'll carry the rest forward". So if in addition to that above you sold a 3rd asset for a £6k loss, you'd still have to say your net gain in the year was 24k-12k-6k=6k, with nothing to carry forward. And as Vanguard says, you have to report all the losses that year - you can't suddenly bring them up with HMRC the next year.

GeoffTF

Qualifying bonds are not subject to CGT. If the bonds are above par, you get a capital loss, rather than a capital gain. You cannot allow that loss against CGT. Bond funds are taxed differently:

https://monevator.com/bonds-and-bond-funds-taxed/

Fixed term savings accounts are currently more attractive than nominal bonds or nominal bond funds. Index linked have their place. Nonetheless, the 1-10 year global index linked bond fund mentioned recently has an average real redemption yield of almost exactly -2% after costs. That means that you lose 2% after inflation every year. Nonetheless, that might turn out to be better than both nominal bonds and equities.

eskbanker

aroominyork said:

I’m sure it’s been written about thousands of times so signposting to the best guides would be welcome.

It's a subject that is conceptually very simple but quite complex in its implementation, so https://www.gov.uk/capital-gains-tax/print is a decent primer on the basics, whereas https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual has the detail.

In between are numerous other guides that are inevitably less definitive but couched in language that may be more approachable than HMRC-speak - at the risk of stating the obvious, googling 'capital gains tax guide' brings back a selection of such articles, so maybe worth perusing some from there and seeing what resonates with your expectations....

aroominyork

EthicsGradient said:

aroominyork said:

I’ll soon receive a large sum (an inheritance) which will take several years to feed into my and OH’s SIPPs and ISAs so I need to learn how to minimise capital gains tax. The two things which come to mind are i) hold equities in SIPP/ISA accounts and bonds in non-wrapped trading accounts; ii) sell enough each year to take up the CGT allowance, either moving it into a similar fund (avoid matching) or swapping it for 30+ days with a fund held in a wrapped account.

I am interested by Vanguard advising “Gains and losses realised in the same tax year have to be offset against each other, which can reduce the amount of gain subject to tax.” So if one fund gains £24k in a year and another loses £12k, if I sell both do I pay no CGT?

Also from Vanguard, “If your losses exceed your gains, you can carry them forward to offset against gains in the future, provided you have registered these losses with HMRC.” Suddenly I think I’ll be reporting like Donald Trump…!

I’m sure it’s been written about thousands of times so signposting to the best guides would be welcome.

With an OH, one of you can sell an asset, and the other buy it at once, and you won't need to wait 30 days. And they could sell something else, and you buy it, to get the necessary funds. Or you can sell fund A outside a wrapper, and buy B; and sell B in the wrapper and buy A there. How long you're out of the market just depends on your broker's requirements for cleared funds.

Bond income (including from funds with over 60% invested in bonds) counts as interest income, so it, with any interest from savings accounts, has a £1000 (basic rate payer)/£500 (higher rates) zero-rate tax band. So if you plan to have a lot of bonds/bond funds, you could end up above that, at 20%/40%/45% tax, when dividends attract a lower rate. So holding bonds non-wrapped is not always the best idea.

Yes, if you sold 2 assets, and made a gain of £24k on one and a loss of £12k on the other, you'd owe no CGT for them (if they're the only assets you sold, of course). If you make a self-assessment return you still have to give the details in this case - you have to report all your gains and losses if the gross gains add up above the allowance, or the gross proceeds are above 4 times the allowance.

Yes, if you make a net loss, you can carry it forward; but you can't split your losses into "enough to get me below this year's allowance, and I'll carry the rest forward". So if in addition to that above you sold a 3rd asset for a £6k loss, you'd still have to say your net gain in the year was 24k-12k-6k=6k, with nothing to carry forward. And as Vanguard says, you have to report all the losses that year - you can't suddenly bring them up with HMRC the next year.

Really helpful - thank you. So interest is taxed at my marginal rate. Can higher rate tax paid on interest be recovered through relief on additional SIPP contributions? I assume the answer is No because the salary cap is not increased (it is not a salary + interest cap).

ColdIron

Yes. HMRC will raise the threshold that higher rate tax starts (£50,270 for most people)

aroominyork

ColdIron said:

Yes. HMRC will raise the threshold that higher rate tax starts (£50,270 for most people)

So just to confirm, if I have a salary of £60,000 and receive interest of £10,000, I can pay £70,000 gross into a SIPP? Hence 'salary cap' is poor shorthand for all earnings on which income tax (20%/40%/45%) is paid - is that correct?

PS  And I believe income tax rather than CGT is paid on capital gains on bond funds and hence could be reclaimed through further SIPP contributions - is that correct?

NedS

aroominyork said:

ColdIron said:

Yes. HMRC will raise the threshold that higher rate tax starts (£50,270 for most people)

So just to confirm, if I have a salary of £60,000 and receive interest of £10,000, I can pay £70,000 gross into a SIPP? Hence 'salary cap' is poor shorthand for all earnings on which income tax (20%/40%/45%) is paid - is that correct?

PS  And I believe income tax rather than CGT is paid on capital gains on bond funds and hence could be reclaimed through further SIPP contributions - is that correct?

No, you cannot contribute (and receive tax relief on) more than you earn, and interest payments and other investment gains are not earnings.

ColdIron

aroominyork said:

ColdIron said:

Yes. HMRC will raise the threshold that higher rate tax starts (£50,270 for most people)

So just to confirm, if I have a salary of £60,000 and receive interest of £10,000, I can pay £70,000 gross into a SIPP? Hence 'salary cap' is poor shorthand for all earnings on which income tax (20%/40%/45%) is paid - is that correct?

As above, pension contributions do not increase your relevant earnings or the £40,000 annual allowance (let's not get into carry forward). However you asked ...

Can higher rate tax paid on interest be recovered through relief on additional SIPP contributions?

Pension contributions do raise the higher rate tax threshold from £50,270 so you may pay less tax as more of it would be taxed at basic rate and less at higher rate

PS  And I believe income tax rather than CGT is paid on capital gains on bond funds and hence could be reclaimed through further SIPP contributions - is that correct?

Capital gains are capital gains and subject to capital gains tax. Perhaps you mean the treatment of distributions for bond funds. If your fund(s) are less than 40% equities then the distributions are treated as interest and not dividends. Could be good or bad for you depending upon your circumstances. SIPP contributions wouldn't affect this