Asset allocation on unwrapped investments to minimise CGT

aroominyork

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)

-          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.

EthicsGradient

"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

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.

aroominyork

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.

I mean given the assets I already hold. I have about £60k of gilts and do not plan to increase that, so what do I hold unwrapped after them and about £40k of Trojan.

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.

And while I could swap holdings between wrapped and unwrapped if CGT went up so that I wanted equities wrapped and bonds unwrapped, the process of swapping could land me with a huge CGT bill. I take your point about pushing liability forward, but it is better to be taxed 5+5+5+5+30 than 12+12+12+12+12.

EthicsGradient

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.

I mean given the assets I already hold. I have about £60k of gilts and do not plan to increase that, so what do I hold unwrapped after them and about £40k of Trojan.

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.

And while I could swap holdings between wrapped and unwrapped if CGT went up so that I wanted equities wrapped and bonds unwrapped, the process of swapping could land me with a huge CGT bill. I take your point about pushing liability forward, but it is better to be taxed 5+5+5+5+30 than 12+12+12+12+12.

OK, do your other half and you both have the same amount in each type already (£60k gilts; £40k Trojan?; and £50k corporate bond fund, and equity fund? - or is that £100k in cash?), or different amounts? And are any of your existing holdings already sitting on a capital gain? Are you asking just about the order in which to move them all, unchanged, into ISAs, or are there decisions about initial/replacement investment to be made?

aroominyork

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.

EthicsGradient

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.

aroominyork

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?

EthicsGradient

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?

No, I don't mean future assumptions; I mean work out what the current capital gains you both already have on your unwrapped investments are (for you, £40k in Trojan, and apparently £100k in the world index tracker; for your other half, whatever the figures are - £140k in the world index tracker?) Then, you know what CGT you would be liable to if you cashed any in this year (have you used this year's £6k allowance yet?), and where the figures start for future years, when the allowance is £3k (assuming they don't change that again).

I would say that your assumptions for future growth are optimistic, unless you expect inflation to stay high.

aroominyork

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.

EthicsGradient

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.

Do you mean your OH has already realised a capital gain a fraction over £6k this year, so they'll pay a very small amount of CGT, and avoid further trading; or that their entire unwrapped portfolio has a potential capital gain at the moment of just over £6k?

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.