Minimising capital gains tax

ColdIron

I hope we are not talking at cross purposes but to be clear:

As EdSwippet says, dividends, interest and capital gains are not 'relevant UK earnings' and do not increase the amount that you can contribute to a SIPP

But in answer to your question:

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

The answer is yes

aroominyork

ColdIron said:

I hope we are not talking at cross purposes but to be clear:

As EdSwippet says, dividends, interest and capital gains are not 'relevant UK earnings' and do not increase the amount that you can contribute to a SIPP

But in answer to your question:

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

The answer is yes

Yes, I get that. Example: £50k salary, £10k interest. The interest takes you into the higher rate tax band. Investing in a SIPP (up to £50k as the salary cap) recovers the higher rate tax paid on the interest.

aroominyork

Coming back to this – and having learned it is about interest and dividends as well as CGT – is this a good strategy for minimising tax on a lump sum during the few years it would take to tax-wrap it?

Manage investments in GIA so that:

1)      I sell just under the CGT allowance each year, hence c.£12,000 of profit. I can do a straight swap with the investments OH sells so that we continue to hold the same assets.

2)      Try to generate dividends just under £2000 pa. Tax is 8.75% on income over £2000 (so no disaster paying some of this), rising to 33.75% if marginal tax rate is the higher band.

3)      Interest (on assets with >60% fixed income) is taxed at marginal income tax rate. This can be reclaimed through payments into SIPP (up to salary cap).

4)      And it is probably easiest, for tracking purposes, to but Income instead of Accumulation units.

talexuser

Yes, straight swap with someone else to different funds gets by the 30 day rule.
Another idea, if you like say a world (or other area) tracker just swap from eg HSBC to iShares or other cheap version.
I have all the high dividend funds in the portfolio in the ISA to avoid tax, and lower dividend ones in the unwrapped account.
I sell the CGT limit every tax year to reset the base cost to save on CGT in later years. Even with my preference for Investment Trusts nowadays, the stamp duty hit still makes it worthwhile I believe. And it easily gets the 20k for the new ISA year.
Income funds are much simpler to manage outside the ISA, just keep a spreadsheet of dividends and buys and sells, easy to work out CGT then.
Beware Irish domeciled funds, say Vanguard ETFs, they may have a little known tax of Excess Reportable Income, this is a pain to find and work out, even if it is only a handful of pounds a year you are breaking the law not reporting it.

EthicsGradient

talexuser said:

Yes, straight swap with someone else to different funds gets by the 30 day rule.
Another idea, if you like say a world (or other area) tracker just swap from eg HSBC to iShares or other cheap version.
I have all the high dividend funds in the portfolio in the ISA to avoid tax, and lower dividend ones in the unwrapped account.
I sell the CGT limit every tax year to reset the base cost to save on CGT in later years. Even with my preference for Investment Trusts nowadays, the stamp duty hit still makes it worthwhile I believe. And it easily gets the 20k for the new ISA year.
Income funds are much simpler to manage outside the ISA, just keep a spreadsheet of dividends and buys and sells, easy to work out CGT then.
Beware Irish domeciled funds, say Vanguard ETFs, they may have a little known tax of Excess Reportable Income, this is a pain to find and work out, even if it is only a handful of pounds a year you are breaking the law not reporting it.

Not just Irish domiciled ETFs , but any overseas domiciled ETFs - which is practically all of them available on the LSE (most are either Ireland or Luxembourg) - should have ERI declared on them (or they don't have "reporting fund status" - which usually makes them treated less favourably for tax). This does not have to be worried about if they're held in an ISA.

Dazed_and_C0nfused

aroominyork said:

Coming back to this – and having learned it is about interest and dividends as well as CGT – is this a good strategy for minimising tax on a lump sum during the few years it would take to tax-wrap it?

Manage investments in GIA so that:

1)      I sell just under the CGT allowance each year, hence c.£12,000 of profit. I can do a straight swap with the investments OH sells so that we continue to hold the same assets.

2)      Try to generate dividends just under £2000 pa. Tax is 8.75% on income over £2000 (so no disaster paying some of this), rising to 33.75% if marginal tax rate is the higher band.

3)      Interest (on assets with >60% fixed income) is taxed at marginal income tax rate. This can be reclaimed through payments into SIPP (up to salary cap).

4)      And it is probably easiest, for tracking purposes, to but Income instead of Accumulation units.

You cannot forget tax on the first £500/£1,000/£2,000 of interest or dividends.  There are no allowances for these amounts in the normal sense, they are all taxable and, assuming no Personal Allowance is available, get taxed but at a 0% rate.

And although maybe not relevant for you personally at the moment don't forget the £5,000 savings starter rate which can be very useful for those with lower earnings/pension income and in many cases makes the savings nil rate (aka Personal Savings Allowance) redundant.

Taxable interest and dividends are part of your adjusted net income and can impact things like HICBC and loss of Personal Allowance.

For example taxable earnings of £50k, interest of £500 and dividends of £2,000 (with no Gift Aid or pension contributions to deduct) gives adjusted net income of £52,500.  The £500 interest would be taxed at 0%.  The £2,000 dividends would be taxed at 0%

But the HICBC would be 25% of the Child Benefit received as ANI is £52,500.

3) Interest (on assets with >60% fixed income) is taxed at marginal income tax rate. This can be reclaimed through payments into SIPP (up to salary cap).

It may just be terminology but there is nothing to be reclaimed.  The vast majority of (taxable) interest is now paid without any tax being deducted.  The only thing pension contributions will do is change the rates at which the interest is taxed. 

Without pension contributions it might be taxed at 0% and 40%.  With pension contributions it might be taxed at say 0%, 20% and 40%.  But there is usually no tax deducted form the interest so there is nothing to reclaim, just a smaller tax bill.

aroominyork

talexuser said:

Beware Irish domeciled funds, say Vanguard ETFs, they may have a little known tax of Excess Reportable Income, this is a pain to find and work out, even if it is only a handful of pounds a year you are breaking the law not reporting it.

Does this apply to OEICs as well as ETFs?

dales1

talexuser said:

Beware Irish domeciled funds, say Vanguard ETFs, they may have a little known tax of Excess Reportable Income, this is a pain to find and work out, even if it is only a handful of pounds a year you are breaking the law not reporting it.

... but if do you want an ETF (... and please get one with "reporting fund status" per EthicsG above) then ExcessRI is not to be feared; it's just a little bit of extra admin. (It is quite satisfying to get it right, really).

Google for last year's rate of ERI for your ETF, multiply by your holding at the reporting date quoted, and include it as a sum received at typically six months later. Remember it is deductable from your CGT calculation as well.

Dales.

EthicsGradient

aroominyork said:

talexuser said:

Beware Irish domeciled funds, say Vanguard ETFs, they may have a little known tax of Excess Reportable Income, this is a pain to find and work out, even if it is only a handful of pounds a year you are breaking the law not reporting it.

Does this apply to OEICs as well as ETFs?

Potentially, yes. For instance, Vanguard has an ICVC (legally the same as an OEIC, as far as I know) "Global Small Cap Index Institutional Inc GDP": https://www.trustnet.com/factsheets/o/i2x4/vanguard-global-small-cap-index-inc-gbp
This did have ERI on 30 June 2017 - Vanguard use it for their example: https://www.vanguardinvestor.co.uk/content/documents/general/ga-uk-reporting-fund-guide.pdf
However, the KPMG list of reporting funds and their ERIs at https://www.kpmgreportingfunds.co.uk/Home/PublicInvestor (free sign-up ; this is where many reporting funds list their ERIs for British investors) shows the ERI has been 0 in each of the 4 subsequent years. 

masonic

aroominyork said:

talexuser said:

Beware Irish domeciled funds, say Vanguard ETFs, they may have a little known tax of Excess Reportable Income, this is a pain to find and work out, even if it is only a handful of pounds a year you are breaking the law not reporting it.

Does this apply to OEICs as well as ETFs?

To be classed as an OEIC within the UK, the income unit class of a fund must distribute all of its income, so there would be no ERI. Clearly acc units could be thought to have ERI by their very nature, as they don't distribute any of their income, but the acc unit class will have all of its income in the declared dividend. Offshore funds are likely not to be OEICs, as in EthicsGradient's example above. The issue applies to all offshore collective investment instruments, such as funds and ETFs.