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How best to avoid tax on investment gains outside of an ISA

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I’m after some advice for a close friend, who’s life has changed over the last year. Here’s their situation. 

55 years old.

made redundant just before Christmas (minimal pay off, cleared debts) 

Not claimed any benefit/redundancy support as lives with her partner who is in full time employment.  Her total monthly outgoings £1000 pcm. 

£85k in a private SIPP (not drawing it yet)

£20k in a stocks and shares ISA. Will add another £20k for this coming tax year. 

Entitled to full state pension at pension age.

Due to inherit £230,000 in 2-3 months time.

What’s the most tax efficient way/place to invest it all, and still have access to draw enough each month for living costs?  Not sure if tax efficient is the correct wording, how is best to invest it to avoid any/as much as possible tax on any gains/growth.  But still be able to withdraw approx £18k a year. 

Open to any suggestions, and if I’ve missed anything please do ask. 

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Comments

  • friolento
    friolento Posts: 2,420 Forumite
    1,000 Posts Second Anniversary Name Dropper Photogenic
    If she is not working, she can get up to £18,570 a year in savings interest without paying tax https://www.moneysavingexpert.com/savings/tax-free-savings/

  • xylophone
    xylophone Posts: 45,615 Forumite
    Part of the Furniture 10,000 Posts Name Dropper
    She has a SIPP and relevant earnings in this tax year which ends tomorrow - has she made the maximum possible contribution for this year?

    From Saturday, even without relevant earnings, she may still contribute £2880 for the new tax year and the provider will claim tax relief of £720 and add it to her pot.

    If she will have only savings income in the new tax year, she may earn interest of up to £12570 + £5000+ £1000 on non ISA accounts before becoming liable fo tax.

    She can  also  contribute up to £20,000 to ISA.  She might prefer to use a stocks and shares ISA if she otherwise will use deposit accounts for her inheritance(?).

    https://www.gov.uk/apply-tax-free-interest-on-savings

    https://www.thisismoney.co.uk/money/article-1583859/Best-savings-rates-General-savings-Internet-branch.html
  • EthicsGradient
    EthicsGradient Posts: 1,255 Forumite
    Sixth Anniversary 1,000 Posts Photogenic Name Dropper
    edited 5 April 2024 at 12:37AM
    She needs to decide how much volatility she would be comfortable with (since she already has an S&S ISA, and I'd guess the SIPP is in funds/shares too, I'd guess she's happy with some; but she may not feel like having the entire amount in stock markets and seeing what happens).

    She can get £500 in dividends outside an ISA or SIPP without paying income tax on them; at a yield of about 3%, that would be £15,000 she could put in a fund there. And add £20,000 a year to her S&S ISA, and £2,880 to her SIPP (which gets increased to £3,600 by tax relief). She could put the rest in savings accounts, and take her £17,500 a year (presumably increasing with inflation; remember she gets £500 from the fund outside the ISA) from them, until that's exhausted, which by a rough calculation will be after about 6 years - as pointed out above, she can get over £18,000 in interest before paying any tax on it, and that would require more capital than she has, so it's not a worry.

    By then, she'll have built up a good sum in her ISA. She can then start taking the personal allowance plus a third out of her SIPP each year (25% is tax free, so you make, using this year's allowance, £12,570 the 75% amount, and £4,190 the tax-free element), and withdraw the rest of her income needs from the ISA. Keep the contribution of £2,880 each year up to the SIPP -you're allowed to do it, and tax relief tops it up.

    If the dividends on the unsheltered fund look like they'd go above the dividend allowance (currently that £500), and/or the accrued capital gain goes above the CG allowance (currently £3,000), then she could sell a bit of that to keep from paying tax.

    Slightly simpler if she forgets about the £15,000 fund outside the ISA. And depending on her tolerance for risk, she could put the last one or two £20,000 ISA allowances into a cash ISA rather than the S&S ISA.

    I reckon it'd work out OK for her until she qualifies for the state pension (and she should make sure she's qualified for the full state pension already - if not, it'll be worth her paying voluntary contributions until she has).
  • Angelica123
    Angelica123 Posts: 300 Forumite
    Fifth Anniversary 100 Posts Name Dropper
    Is she planning to return to work at any point? And has done the numbers if her plan is to retire early? 


  • dunstonh
    dunstonh Posts: 119,697 Forumite
    Part of the Furniture 10,000 Posts Name Dropper Combo Breaker
    What’s the most tax efficient way/place to invest it all, and still have access to draw enough each month for living costs?
    Pension and offshore bond would be included in the mix with the limited information you have given so far.

    Offshore bond has no internal taxation and isn't subject to capital gains tax or dividend tax.   He could do an annual surrender of segments each year to meet the income need and keep the gain after under the personal allowance.     Therefore avoiding tax.



    I am an Independent Financial Adviser (IFA). The comments I make are just my opinion and are for discussion purposes only. They are not financial advice and you should not treat them as such. If you feel an area discussed may be relevant to you, then please seek advice from an Independent Financial Adviser local to you.
  • longwalks1
    longwalks1 Posts: 3,828 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    Is she planning to return to work at any point? And has done the numbers if her plan is to retire early? 
    No plan to return to work ideally, as only needs £18k a year living costs.  Hoping her total investments (wherever they are) will return her that sum without eating into the original investment.
  • longwalks1
    longwalks1 Posts: 3,828 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    friolento said:
    If she is not working, she can get up to £18,570 a year in savings interest without paying tax https://www.moneysavingexpert.com/savings/tax-free-savings/
    Thank you very much Friolento, I thought it was £12k ish before paying tax, so that extra £6,750 may be enough allowance to stay under the tax threshold.  I’ll look into it further 
  • longwalks1
    longwalks1 Posts: 3,828 Forumite
    Part of the Furniture 1,000 Posts Name Dropper
    xylophone said:
    She has a SIPP and relevant earnings in this tax year which ends tomorrow - has she made the maximum possible contribution for this year?

    She has made £20k deposit into ISA for tax year that ends tomorrow, and as soon as inheritance comes through will put a further £20k in for this coming year.  Hasn’t made any SIPP contribution, at present her thoughts are why tie up money in SIPP if no intention of drawing it yet, unless it’s the only way to avoid tax.  Happy/interested to be told this is wrong way to look at it?  Her partner has a large SIPP that can be accessed in 10 years which should be ample for them both. 

    From Saturday, even without relevant earnings, she may still contribute £2880 for the new tax year and the provider will claim tax relief of £720 and add it to her pot.

    please ignore my ignorance, do you mean if she deposits £2880 into her private SIPP, the provider will add £720 to the pot?

    If she will have only savings income in the new tax year, she may earn interest of up to £12570 + £5000+ £1000 on non ISA accounts before becoming liable fo tax.

    thank you for this, I saw a previous reply stating it too.  It could be enough allowance to avoid tax.

    She can  also  contribute up to £20,000 to ISA.  She might prefer to use a stocks and shares ISA if she otherwise will use deposit accounts for her inheritance(?).

    will be adding £20k into ISA the day inheritance comes through and invested in the same funds.

    https://www.gov.uk/apply-tax-free-interest-on-savings

    https://www.thisismoney.co.uk/money/article-1583859/Best-savings-rates-General-savings-Internet-branch.html

    Hoping my replies in italic font to you xylophone come out right? 
  • longwalks1
    longwalks1 Posts: 3,828 Forumite
    Part of the Furniture 1,000 Posts Name Dropper

    She needs to decide how much volatility she would be comfortable with (since she already has an S&S ISA, and I'd guess the SIPP is in funds/shares too, I'd guess she's happy with some;

    Happy with the volatility of ETF’s/funds as have seen good growth of partners SIPP and DC pension since 2017

    She can get £500 in dividends outside an ISA or SIPP without paying income tax on them; at a yield of about 3%, that would be £15,000 she could put in a fund there. And add £20,000 a year to her S&S ISA, and £2,880 to her SIPP (which gets increased to £3,600 by tax relief). She could put the rest in savings accounts, and take her £17,500 a year (presumably increasing with inflation; remember she gets £500 from the fund outside the ISA) from them, until that's exhausted, which by a rough calculation will be after about 6 years - as pointed out above, she can get over £18,000 in interest before paying any tax on it, and that would require more capital than she has, so it's not a worry.

    Thank you for this, makes sense and the £18,570 allowance is enough to survive and avoid tax.  Will obviously load up the ISA each year by the maximum allowed (currently £20k)

    By then, she'll have built up a good sum in her ISA. She can then start taking the personal allowance plus a third out of her SIPP each year (25% is tax free, so you make, using this year's allowance, £12,570 the 75% amount, and £4,190 the tax-free element), and withdraw the rest of her income needs from the ISA. Keep the contribution of £2,880 each year up to the SIPP -you're allowed to do it, and tax relief tops it up.

    Again, she had no idea about the SIPP tax relief.  So, when the time comes to draw from the SIPP, draw the maximum tax free, and top up her cost of living by withdrawing from the (by then) large ISA.  

    If the dividends on the unsheltered fund look like they'd go above the dividend allowance (currently that £500), and/or the accrued capital gain goes above the CG allowance (currently £3,000), then she could sell a bit of that to keep from paying tax.

    This comment is very interesting EthicsGradient.  For example, IF the unsheltered fund had a bumper year and looked to go £10k over CG allowance, could you sell £10,001 to remain from paying tax?

    I reckon it'd work out OK for her until she qualifies for the state pension (and she should make sure she's qualified for the full state pension already - if not, it'll be worth her paying voluntary contributions until she has).

    Thank you, have used the gov. Full state pension checker online and is already full paid up.  She checked when Martin Lewis mentioned it last year.

    Hope my replies come out OK EthicsGradient
  • Albermarle
    Albermarle Posts: 27,896 Forumite
    10,000 Posts Seventh Anniversary Name Dropper
    My only comment is that you/she/anybody should not be so focused on avoiding paying tax, that wrong decisions are made.

    A better strategy is to have a proper financial plan going forward, probably with a mix of cash savings, investments and pension. Then work out how best to implement the plan and pay the least tax.
    Not the other way around.
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