Asset allocation on unwrapped investments to minimise CGT



OH and I each have about £200k unwrapped which it will take a
while to move into SIPPs/ISAs. How would you invest it to minimise tax (assuming
basic rate through earnings or by maximising SIPP contributions to increase higher
rate threshold, with savings PSA used up elsewhere) if the options are:
- Low coupon nominal gilts
- Wealth preservations funds (Troy Trojan, since Capital Gearing Trust is wrapped)
- Corporate bond funds (Man GLG Sterling Corporate Bond)
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Equity funds (HSBC FTSE All World Index)?
Obviously you first maximise the gilts. Troy Trojan seems
next, given low dividend and modest growth prospects. After that, do you
swallow 20% tax on the income from the bond fund (say 8% pa taxed at 20%) and
expect moderate capital growth, or pay tax on the equity fund dividend (say 2%
pa taxed at 8.75%) and expect higher capital growth?
From some rough calculations, it seems to me the tax on the corporate bond fund is the largest likely liability so I should wrap the corporate bond fund and keep the equity fund unwrapped.
Comments
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"Maximising" the gilts would mean putting all 200k (or 180k if you can use your ISA allowance this year) in them. So I suspect there's something else you're assuming, or have decided, that you haven't told us yet.1
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Very hard to know what to do for the best for several years worth of unwrapped holdings when the taxation landscape is already changing rapidly and we are no more than a year and a bit away from a new government being elected.This year income tax is probably your biggest enemy, whereas from next year CGT is going to become increasingly troublesome. Will the rate of CGT remain this attractive vs income tax? If not, that could swing it the other way. If you have assets with the highest growth potential outside of your tax shelters, then that does tend to push your liability forward to a time when it may be less favourable to crystallise those gains.
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EthicsGradient said:"Maximising" the gilts would mean putting all 200k (or 180k if you can use your ISA allowance this year) in them. So I suspect there's something else you're assuming, or have decided, that you haven't told us yet.masonic said:Very hard to know what to do for the best for several years worth of unwrapped holdings when the taxation landscape is already changing rapidly and we are no more than a year and a bit away from a new government being elected.This year income tax is probably your biggest enemy, whereas from next year CGT is going to become increasingly troublesome. Will the rate of CGT remain this attractive vs income tax? If not, that could swing it the other way. If you have assets with the highest growth potential outside of your tax shelters, then that does tend to push your liability forward to a time when it may be less favourable to crystallise those gains.0
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aroominyork said:EthicsGradient said:"Maximising" the gilts would mean putting all 200k (or 180k if you can use your ISA allowance this year) in them. So I suspect there's something else you're assuming, or have decided, that you haven't told us yet.masonic said:Very hard to know what to do for the best for several years worth of unwrapped holdings when the taxation landscape is already changing rapidly and we are no more than a year and a bit away from a new government being elected.This year income tax is probably your biggest enemy, whereas from next year CGT is going to become increasingly troublesome. Will the rate of CGT remain this attractive vs income tax? If not, that could swing it the other way. If you have assets with the highest growth potential outside of your tax shelters, then that does tend to push your liability forward to a time when it may be less favourable to crystallise those gains.0
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Everything here is invested, no cash. Unwrapped we both have gilts, I have Trojan (Capital Gearing Trust is wrapped), we both have equities. Corp bonds are wrapped. So this is about whether that is the best allocation. Each tax year I prioritise moving equities into wrappers.0
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You need to work out what the capital gains for each of you have already been, and start from there. I think you'll need to use a spreadsheet to look at several scenarios.0
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EthicsGradient said:You need to work out what the capital gains for each of you have already been, and start from there. I think you'll need to use a spreadsheet to look at several scenarios.I did that yesterday. I assumed a nominal amount of £100k:Corporate bonds: 6% income taxed at 20%, 2% capital growth taxed at 10%. Total tax liability £1400.Equity fund. 2% dividend taxed at 8.75%. 10% capital growth taxed at 10%. Total tax liability £1175.Does that look a reasonably logical way to conclude that after my unwrapped gilts and WP fund, I wrap corp bonds and keep equities unwrapped?0
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aroominyork said:EthicsGradient said:You need to work out what the capital gains for each of you have already been, and start from there. I think you'll need to use a spreadsheet to look at several scenarios.I did that yesterday. I assumed a nominal amount of £100k:Corporate bonds: 6% income taxed at 20%, 2% capital growth taxed at 10%. Total tax liability £1400.Equity fund. 2% dividend taxed at 8.75%. 10% capital growth taxed at 10%. Total tax liability £1175.Does that look a reasonably logical way to conclude that after my unwrapped gilts and WP fund, I wrap corp bonds and keep equities unwrapped?
I would say that your assumptions for future growth are optimistic, unless you expect inflation to stay high.0 -
We may be at cross-purposes, EG. I am asking which assets to hold wrapped (SIPP/ISA) and which to hold unwrapped. Minimising annual tax is straightforward: OH has a capital gain a fraction over £6k this year so we'll avoind trading; I have not traded but am carrying a c.£3k capital loss from last year so I'll aim to trade a gain between £6k-£9k (I can swap the wrappers between the unwrapped index fund and a currently wrapped active equity fund).I agree those assumptions are at the high end but I used them to magnify the tax impact.0
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aroominyork said:We may be at cross-purposes, EG. I am asking which assets to hold wrapped (SIPP/ISA) and which to hold unwrapped. Minimising annual tax is straightforward: OH has a capital gain a fraction over £6k this year so we'll avoind trading; I have not traded but am carrying a c.£3k capital loss from last year so I'll aim to trade a gain between £6k-£9k (I can swap the wrappers between the unwrapped index fund and a currently wrapped active equity fund).I agree those assumptions are at the high end but I used them to magnify the tax impact.
If the latter, then your OH should probably not avoid trading this year, but instead trade to realise a capital gain of a bit under £6k this year. If they don't do that, then next year the total gain they're sitting on will be £6k plus any further gain in the rest of this year (and more, next tax year, if you don't realise it right at the start). On £140k, that could easily be another £7k (just 5% growth), so they'd then have a total of £13k - and only £3k allowance next year.
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