CGT with GIA

billy2shots

I'm a little muddled on how best to manage a GIA/ investment account/ share account to best deal with capital gains tax. 

I'm perfectly happy with my knowledge on my allowance and the fact tax is only due on realising the gain etc. 

It's the more detailed part I'm in two minds about. 

I had planned to sell all my holdings, pay the CGT due (after allowance) then reinvest in a similar fund (or wait 30 days to use the same one).

This seemed really simple to me, means there is no future surprises as the CGT has been paid annually so what remains can all come out at a future date only considering that years return for CGT that year. 

This weekend I had an online discussion with someone who has given me what seems like a really confusing alternative. 

I will try and document it clearly

- after the first years gain (fingers crossed) sell only enough to make use of the CGT allowance.

- This would mean your initial holding potentially isn't completely CGT clear. 

- reinvest your crystallised amount that is CGT clear. This now becomes a second pot with pot 1 being your initial investment plus some gain that CGT has not been settled on. 


After the second years returns

- again only crystallise enough to make use of the CGT allowance 

- this should cover all of pot 2 and some of pot 1. 

- the rest of pot 1 that the CGT allowance doesn't cover will need to be added to the outstanding uncovered gain in pot 1 from the earlier year. 

- of course, there is no tax on pot 1 yet because we haven't actually realised it yet but there will be at some point in time unless markets tank and you sell then (not ideal). 

This pattern repeats until you withdraw and realise all unpaid gains. 



A few points. 

We used an initial investment figure of £150k. 
We used 10% annual returns. 
This second method supposedly worked out £27 better off after 3 years. 


My thinking. 

It seems way too convoluted for the sake of £27. 
I couldn't even work through the system to show that £27 anyway, I got lost during the explanation. 

Multiple pots and buy dates could be a tax return nightmare but also must result in multiple buy and sale fees eroding the supposed £27 gain. 

I'm still convinced that the initial pot that isn't fully CGT clear would compound up leading to a potentially large CGT bill on selling and withdrawing the entire pot. It would also be gambling that CGT rates won't increase in the future. 



Thanks if you are still with me. 


For £27 I wouldn't even bother asking this question as I would stick to my simple first thought. 
However in the next couple of years I want to sell my business and may need to GIA £700k. The figures then could mean it's worth while exploring this alternative method. 



Conclusion

Sell entire holdings to realise gains every year and pay off CGT as you go. 

Or

Only realise gains up to the CGT allowance each year, leaving everything above untaxed until a future date. 

Dazed_and_C0nfused

Was it even worth the trouble of that post for £27 (even allowing for the potential larger amount ultimately involved)?

EdSwippet

I'd be astonished if the total saving on this was a mere £27. Over the longer term it will likely run into £thousands.

For a good worked example, read this article:

Defusing capital gains: a worked example - Monevator

billy2shots

Dazed_and_C0nfused said:

Was it even worth the trouble of that post for £27 (even allowing for the potential larger amount ultimately involved)?

 For £27 no. 

Based on £700k over many years of bed and ISA, potentially hence my wanting to understand 

billy2shots

EdSwippet said:

I'd be astonished if the total saving on this was a mere £27. Over the longer term it will likely run into £thousands.

For a good worked example, read this article:

Defusing capital gains: a worked example - Monevator

Thanks, I will check it out. 

billy2shots

EdSwippet said:

I'd be astonished if the total saving on this was a mere £27. Over the longer term it will likely run into £thousands.

For a good worked example, read this article:

Defusing capital gains: a worked example - Monevator

Thanks, I will check it out. 


Edit,

Nice clear example however money crystallised to realise the gain each year is never reinvested. 

If it were he would far more invested resulting in a larger gain at the end of each year so by only crystallising an amount to use CGT allowance each year that final tax bill will be large. 


In his example he had £62k in the final pot to be taxed. 

Reinvesting would see that at £243,000 minus £36k (3 years CGT allowance used ) 

Final tax bill on £207k rather than £62k


I still need convincing 

Jeremy535897

1. The primary driver is investment choice, so your stark choice only applies if you are actually happy with the investment performance and are merely selling for tax reasons.
2. I am a firm believer in delaying tax payments for as long as possible, but you could consider realising sufficient gains to use up any remaining basic rate band as well as the annual exemption. Selling everything annually increases dealing costs.
3. If you are married or in a civil partnership, consider splitting the holdings.
4. Use an ISA as much as possible.

billy2shots

Jeremy535897 said:

1. The primary driver is investment choice, so your stark choice only applies if you are actually happy with the investment performance and are merely selling for tax reasons.
2. I am a firm believer in delaying tax payments for as long as possible, but you could consider realising sufficient gains to use up any remaining basic rate band as well as the annual exemption. Selling everything annually increases dealing costs.
3. If you are married or in a civil partnership, consider splitting the holdings.
4. Use an ISA as much as possible.

1. Investment choice will be the same as SIPP, S&S, Portfolio. 

2.This is the debate.

3. 2 GIAs will be used (his and hers)

4. His and her ISA and pensions fully utilised before considering a GIA. 


So it is point 2 that is the head scratcher. 



Could anyone with a better grasp of maths and some time on their hands work out the following scenario. 

Based on only selling up to the amount that will fully utilise that years CGT allowance AND then reinvest that money back into the GIA.

£150K Starting amount
10% return

Everything extracted at the start of year 4. 


Vs


My previous simplified plan sounds like it wouldn't be the most tax efficient and goes something like this. Using £12k CGT allowance for simplicity.

- £150k with 10% return= £165k at the end of year  1. = £15k capital gain

- Sell everything, use my £12 k allowance meaning I pay tax on £3k
= £300 of tax at 10% CGT

Tax all paid my pot can come out clean but I will reinvest resetting the CGT clock at £165k

- year 2 that £165k (let's leave the £300 tax paid out for a minute again for maths ease) rises 10%
= £181,5000 

- A gain of £16,500. Again sell all, use my £12k allowance meaning there is tax to pay on £4,500 (£450 + £300 from year 1) 

Year 3. Reset the CGT clock again by investing £181,500

- 10% rise gives me £199,650, a gain of 18,150. 

- use my £12k allowance leaving tax to pay on £6,150 = 615.50


Now my entire pot can be withdrawn without further tax which over the years would mean

£199,650 minus (years 1,2 and 3 tax already paid)

£199,650 - £300 - £450 - £615.50 =

 £198,284.50


Simples.....

EdSwippet

billy2shots said:
... So it is point 2 that is the head scratcher. 

I see now what you're comparing.

I think your choice of numbers is giving you a false sense of the benefit, or otherwise, of not paying CGT earlier than necessary. In particular, your choice of £150k and 10% gains is barely above the £12k or so allowance, and the three or four year timescale is too short for compounding of deferred tax to have much effect. (Simple example: cut down your starting value to £15k and the £27 difference will disappear to £0, because everything lives inside the annual CGT allowance.)

I'd suggest re-running your numbers with a starting value of £300k rather than £150k, and over ten years rather than four. You should, I think, find that the difference between your plans comes to much more than the five or so times £27 that the multipliers in your start value (x2) and investment period (x2.5) suggest.

Final thought. If you're really planning to invest £150k for just three or four years, I'd suggest that this is too short a timescale for an acceptable risk profile.

billy2shots

EdSwippet said:

billy2shots said:
... So it is point 2 that is the head scratcher. 

I see now what you're comparing.

I think your choice of numbers is giving you a false sense of the benefit, or otherwise, of not paying CGT earlier than necessary. In particular, your choice of £150k and 10% gains is barely above the £12k or so allowance, and the three or four year timescale is too short for compounding of deferred tax to have much effect. (Simple example: cut down your starting value to £15k and the £27 difference will disappear to £0, because everything lives inside the annual CGT allowance.)

I'd suggest re-running your numbers with a starting value of £300k rather than £150k, and over ten years rather than four. You should, I think, find that the difference between your plans comes to much more than the five or so times £27 that the multipliers in your start value (x2) and investment period (x2.5) suggest.

Final thought. If you're really planning to invest £150k for just three or four years, I'd suggest that this is too short a timescale for an acceptable risk profile.

Many thanks for your comment.

The real figure will be £700k from business sale and the timescale will be as many years needed to bed and ISA. 

The investment in Gia and then ISA will be a bridge to SiPP from mid 40s to 57 so investment length is fine to ride out the storm. 



My problem. 

I don't know how to model up the alternative method as I don't really follow the system or maths of only selling enough each year to stick within my CGT allowance.
So I can't see which way is better. 

Deferring tax seems to be the popular decision but I like to see the numbers on the page to compare total tax liabilities over the life of the issue. Basically £700k to £0.

I can project my method but I have nothing to compare that to. 

EdSwippet

billy2shots said:
The real figure will be £700k from business sale and the timescale will be as many years needed to bed and ISA. 

Unless I'm missing something, I can't see that you could ever bed and ISA £700k.

Let's say markets gain around 7% on average. That would give you £49k more after one year. Perhaps £21k in dividends, taxed at 7% leaves £19.5k, and £28k in capital gains, of which (let's say) a full £16k is taxed at 20% leaves £24.8k. Net gain £44.3k.

The most you can put into an ISA is currently £20k. Double that if you rope in a spouse. You start with £700k. After one year of maximal bed and ISA with spouse, reinvesting the remainder, you now have £704.3k. More than you started with; further from, rather than closer to, £0. And -- notwithstanding a sizeable increas in annual ISA allowances -- increasingly remote with each year.