Where to put legacy outside of tax free wrappers?

handful

I'm fortunate to be shortly receiving a significant and unexpected legacy of circa £250k and looking for suggestions as to what to do with it!

My thoughts so far are:-

1) Pay off the remaining c£40k of mortgage - no penalty payments so no brainer.

2) Pay off the c£30k finance outstanding on our motorhome - no penalty

3) Maximise ISA allowances for myself and OH

4) Maximise pension contribution up to earnings limit for this year for myself and OH. (Mine is a SIPP with II)

After that it becomes more tricky. At current savings rates I can only save around £10k before hitting my interest allowance of £500 (40% tax payer) Also can save £20k in the OH name (20% tax payer)

What other tax efficient options could people suggest for me to consider?

Premium Bonds maybe?!

Just add cash to II and invest outside the tax free wrapper?

Anything else?

Doctor_Who

handful said:

Premium Bonds maybe?!

Just add cash to II and invest outside the tax free wrapper?

Anything else?

Premium bonds for a HR tax payer can be useful, although no guarantees that you'll beat a good EA account rate after tax.

Are you thinking of extra pension contributions for next year? If you have enough earnings you could consider AA carry forward (assuming any available).

Investing outside a tax wrapper means you can use the dividend allowance/CGT allowance, although these have been reduced this year and will be again next year.

You can earn more interest than the £500 PSA (or £1000 PSA for OH), you'll just pay tax on the excess.

As someone said recently......paying some tax isn't illegal!

dunstonh

Typically, once you have used pension and ISA allowance, you move onto unwrapped (GIA) or offshore bonds (more complicated but can be viable in a smaller range of cases) or onshore bond (rarely viable nowadays but a small niche may fit)

NedS

For the purposes of minimising tax, look at short duration government gilts with low coupons, maybe building a bond ladder with maturity dates to allow feeding into your ISA(s) upon maturity. You can purchase and hold these in a GIA account outside of any tax wrapper.

A UK government gilt such as TN25 currently yields 5.28% but the coupon is only 0.25% (taxable) and the rest comes from a capital gain when holding to maturity which is tax free. So TN25 will currently net a 40% tax payer a return of 5.17% after tax. See here:

https://www.yieldgimp.com/gilt-yields

Pipthecat

Premium Bonds maybe?!

Maybe not a good long term investment, however they have their advantages.  Prize pool of 4% tax free and you can have your money back in your bank account in a couple of days makes it a better home for any cash reserve than most current account/instant savings account.

handful

Doctor_Who said:

handful said:

Premium Bonds maybe?!

Just add cash to II and invest outside the tax free wrapper?

Anything else?

Premium bonds for a HR tax payer can be useful, although no guarantees that you'll beat a good EA account rate after tax.

Are you thinking of extra pension contributions for next year? If you have enough earnings you could consider AA carry forward (assuming any available).

Investing outside a tax wrapper means you can use the dividend allowance/CGT allowance, although these have been reduced this year and will be again next year.

You can earn more interest than the £500 PSA (or £1000 PSA for OH), you'll just pay tax on the excess.

As someone said recently......paying some tax isn't illegal!

I am thinking about next year's pension allowance to some extent although early retirement may put that in doubt! I'm probably looking at tying up some cash until next years ISA allowances kick in. As to paying tax not being illegal, I think I've paid my fair share over the years! HMRC has seen £130k out of this estate as well! Thanks for the info given though.

handful

dunstonh said:

Typically, once you have used pension and ISA allowance, you move onto unwrapped (GIA) or offshore bonds (more complicated but can be viable in a smaller range of cases) or onshore bond (rarely viable nowadays but a small niche may fit)

Presumably I can put money into my II SIPP account and they will keep it separate from my "tax free pension wrapper" ?

handful

NedS said:

For the purposes of minimising tax, look at short duration government gilts with low coupons, maybe building a bond ladder with maturity dates to allow feeding into your ISA(s) upon maturity. You can purchase and hold these in a GIA account outside of any tax wrapper.

A UK government gilt such as TN25 currently yields 5.28% but the coupon is only 0.25% (taxable) and the rest comes from a capital gain when holding to maturity which is tax free. So TN25 will currently net a 40% tax payer a return of 5.17% after tax. See here:

https://www.yieldgimp.com/gilt-yields

I will research this, thank you.

handful

Pipthecat said:

Premium Bonds maybe?!

Maybe not a good long term investment, however they have their advantages.  Prize pool of 4% tax free and you can have your money back in your bank account in a couple of days makes it a better home for any cash reserve than most current account/instant savings account.

Yes and the cash remains easily accessible for when next years ISA allowances kick in, my thoughts originally. Thanks

Doctor_Who

handful said:

Doctor_Who said:

handful said:

Premium Bonds maybe?!

Just add cash to II and invest outside the tax free wrapper?

Anything else?

Premium bonds for a HR tax payer can be useful, although no guarantees that you'll beat a good EA account rate after tax.

Are you thinking of extra pension contributions for next year? If you have enough earnings you could consider AA carry forward (assuming any available).

Investing outside a tax wrapper means you can use the dividend allowance/CGT allowance, although these have been reduced this year and will be again next year.

You can earn more interest than the £500 PSA (or £1000 PSA for OH), you'll just pay tax on the excess.

As someone said recently......paying some tax isn't illegal!

I am thinking about next year's pension allowance to some extent although early retirement may put that in doubt! I'm probably looking at tying up some cash until next years ISA allowances kick in. As to paying tax not being illegal, I think I've paid my fair share over the years! HMRC has seen £130k out of this estate as well! Thanks for the info given though.

I did say 'some tax', but yes, I think HMRC has had their 'pound of flesh'. 

As NedS said, low coupon/short duration gilts are an option to hold in a GIA. The coupon is taxable, but since the coupon is low the tax is minimal. The main point of gilts is that they are exempt from CGT, so any gain isn't taxable (the gain is the majority of the return). The coupon, redemption date and redemption price are guaranteed, so the only real variable is how much you buy them for. I hold several such gilts in my II GIA as an alternative to saving in fixed rate bonds where the interest would be taxable. 

Pat38493

NedS said:

For the purposes of minimising tax, look at short duration government gilts with low coupons, maybe building a bond ladder with maturity dates to allow feeding into your ISA(s) upon maturity. You can purchase and hold these in a GIA account outside of any tax wrapper.

A UK government gilt such as TN25 currently yields 5.28% but the coupon is only 0.25% (taxable) and the rest comes from a capital gain when holding to maturity which is tax free. So TN25 will currently net a 40% tax payer a return of 5.17% after tax. See here:

https://www.yieldgimp.com/gilt-yields

So the repayment of the face value of the gilt is tax free then, even outside of a pension or ISA wrapper?