CGT with GIA

billy2shots

EdSwippet said:

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.

Many thanks for the input. 

The GIAs would be X2. 

Bed and ISA £40 k as you say. 

Our next year's living expenses (fired) would come out of the GIA before reinvesting having paid any CGT due. 

£40k ISA

£30-£35k living expenses
CGT 

I would love £700k to never run out but it will. 

dales1

I'm with Jeremy535897 above.

You don't need complicated calcs, just the principles.

It makes simple sense to crystallise gains each year to use up your entire annual CGT allowance (or else lose it). That's the first and obvious step. (If you don't do this, you are building up tax liabilities unnecessarily).

Also, I usually crystallise even more gains (and pay the CGT), in order to use up the entire remainder of my present tax band (because tax bands are frozen for a few more years, and because my other income is increasing to erode this gap). If you might need the cash out in future years, crystallising early might avoid paying CGT at higher rates.

billy2shots

Thanks everyone for your comments. 

I have obviously been less than clear with what I'm asking. 

I will use all my CGT allowance every year. 

I will use my pension and ISA allowance over the GIA. 

I am investing for the longer term. 




What I am struggling with is, what is more tax efficient?

1  Selling everything each year, paying CGT then reinvesting to reset the clock on the investment sum. Rinse and repeat each year. Very clean and no hidden future CGT suprise.  
I can do the maths on this way. 

Or

2. Only sell enough of the investment up to the CGT allowance before reinvesting that money back in thus creating 2 pots in affect. One pot would be crystallised as CGT would have been paid. One pot would be un-crystallised as no CGT has been paid. 
Rinse and repeat each year until withdrawing at some future point. A future CGT bill would need to be paid as it's not be totally cleared each year. 

I can not do the maths on this way so can not work out if or how much this way is better off. 

Keep_pedalling

billy2shots said:

EdSwippet said:

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.

Many thanks for the input. 

The GIAs would be X2. 

Bed and ISA £40 k as you say. 

Our next year's living expenses (fired) would come out of the GIA before reinvesting having paid any CGT due. 

£40k ISA

£30-£35k living expenses
CGT 

I would love £700k to never run out but it will. 

We did something similar with an inheritance of a slightly larger amount. Like you we were not simply investing for the future but taking out an annual amount to supplement our pensions and for gifts for our children. It took us 10 years but the GIA is no more and everything is in ISAs. 

We never sold our entire GIA until the the final year of its existence just utilised our annual allowances at the time of an annual rebalance and bed and ISA. We avoided paying any CGT throughout that period.

Jeremy535897

One issue is whether, after you bed and breakfast, you buy back the same stock. If you sell the lot, that doesn't matter, but if you sell just enough to use the annual exemptions, and buy back the same stock, the pooling rules will average the base cost of the stock bought with the stock retained.

billy2shots

Jeremy535897 said:

One issue is whether, after you bed and breakfast, you buy back the same stock. If you sell the lot, that doesn't matter, but if you sell just enough to use the annual exemptions, and buy back the same stock, the pooling rules will average the base cost of the stock bought with the stock retained.

That was another reason for selling the lot each year rather than some. 

Sell a vanguard global tracker buy HSBC global tracker. Next year, flip reverse. 

The alternative is holding on to a pit of vanguard global tracker (VWRL) and having a second pot of HSBC. Alternatively wait 30 days.

billy2shots

Keep_pedalling said:

billy2shots said:

EdSwippet said:

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.

Many thanks for the input. 

The GIAs would be X2. 

Bed and ISA £40 k as you say. 

Our next year's living expenses (fired) would come out of the GIA before reinvesting having paid any CGT due. 

£40k ISA

£30-£35k living expenses
CGT 

I would love £700k to never run out but it will. 

We did something similar with an inheritance of a slightly larger amount. Like you we were not simply investing for the future but taking out an annual amount to supplement our pensions and for gifts for our children. It took us 10 years but the GIA is no more and everything is in ISAs. 

We never sold our entire GIA until the the final year of its existence just utilised our annual allowances at the time of an annual rebalance and bed and ISA. We avoided paying any CGT throughout that period.

Many thanks. 

This does seem the popular way to go even if I am finding the calculations challenging. 

Keep_pedalling

billy2shots said:

Keep_pedalling said:

billy2shots said:

EdSwippet said:

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.

Many thanks for the input. 

The GIAs would be X2. 

Bed and ISA £40 k as you say. 

Our next year's living expenses (fired) would come out of the GIA before reinvesting having paid any CGT due. 

£40k ISA

£30-£35k living expenses
CGT 

I would love £700k to never run out but it will. 

We did something similar with an inheritance of a slightly larger amount. Like you we were not simply investing for the future but taking out an annual amount to supplement our pensions and for gifts for our children. It took us 10 years but the GIA is no more and everything is in ISAs. 

We never sold our entire GIA until the the final year of its existence just utilised our annual allowances at the time of an annual rebalance and bed and ISA. We avoided paying any CGT throughout that period.

Many thanks. 

This does seem the popular way to go even if I am finding the calculations challenging. 

I have to confess we were using an IFA to manage our investments so he did the work on this. 

EdSwippet

billy2shots said: 

This does seem the popular way to go even if I am finding the calculations challenging. 

The calculations aren't difficult exactly, but perhaps tedious when run over multiple years. A small spreadsheet can easily do it for you.

Intuitively though, it should be pretty obvious that deferring paying capital gains tax means that you have more money invested and compounding for you until the point at which you can no longer defer it. In fact, that's more or less the entire basis on which SIPPs and other DC pensions are based (well, 75% of it; the remaining 25% being the tax-free lump sum).

billy2shots

EdSwippet said:

billy2shots said: 

This does seem the popular way to go even if I am finding the calculations challenging. 

The calculations aren't difficult exactly, but perhaps tedious when run over multiple years. A small spreadsheet can easily do it for you.

Intuitively though, it should be pretty obvious that deferring paying capital gains tax means that you have more money invested and compounding for you until the point at which you can no longer defer it. In fact, that's more or less the entire basis on which SIPPs and other DC pensions are based (well, 75% of it; the remaining 25% being the tax-free lump sum).

That's the positive. 

The negative is all of that unrealised gain is also compounding up so the future CGT bill is growing.

At least that was my take on it. Without modeling it full time against my initial way I won't know lol because I can't do the math..