I just worked out how to avoid CGT…

aroominyork

I have a chunk of money in an unwrapped equity tracker. At current valuations it will take 6-7 years to sell it within £3k CGT allowance - longer if markets rise - but I want to sell it in 2-3 years to get it into ISA and SIPP as soon as possible. I’ve just worked out how to avoid CGT: sell an ISA/SIPP gilt index fund and buy the same equity tracker; sell the unwrapped equity tracker and buy low coupon nominal gilts that match the gilt index fund like a mix of TG31 and TG35 (then rebalance the two every couple of years). The problem is I would have to take a one-off CGT hit.

What would you do (assuming CGT rules don’t change – obviously I’ll do nothing before the first Labour budget)? Take the hit; or sit it out and pay the CGT when it falls due or, if markets fall, make the switch without having to pay the one-off hit?

Ciprico

one more factor to consider is as both parties have promised not to raise i/c tax, ni or vat, we can be pretty sure other taxes will rise. Very possibly CGT, so waiting may not be a good plan...

Also, to realise your objective you'd have to hold the gilts to maturity, possible 11 years...

masonic

Aside from hoping for a crash, I guess the only possibility that could make waiting worthwhile is if they increase the annual exempt amount alongside the rate of tax. I don't think this is likely though, and it may not leave you better off depending on the gain you are carrying.

EthicsGradient

If you shelter it at the rate of each year's CGT allowance, it'll take longer, but you'll pay no CGT. Moving it faster will just save you income tax on the dividends of the tracker. So compare that income tax to the CGT you'll pay if you move it sooner. Say it takes you 15 years, thanks to some growth, to move, and the yield is 3%; a basic rate payer pays 8.75% on 15*3%=3.9375% of the total value (say 4%) on the amount to move in that 15th year, compared to 10% of the proportion that is gain (knowing this would help the comparison a lot). If your current gain is a small part of the total value (eg 20%), it probably is worth taking the CGT hit on it now; but if it's over 40%, probably not.

Knowing what proportion is currently gain would also give an idea of how much the gain is likely to rise - if it's small now, the gain will likely rise faster.

aroominyork

HSBC FTSE All World Index. s104 value 215p; current price 250p. I hadn't taken into account dividend tax and will next month receive a £2700 distribution. Should I have sold the day before ex-div and rebought the next day? (Answer: No. A 0.15% overnight unit price rise would more than cover the basic rate dividend tax. Don't try to be too clever.)

Grumpy_chap

aroominyork said:

I have a chunk of money in an unwrapped equity tracker. At current valuations it will take 6-7 years to sell it within £3k CGT allowance - longer if markets rise - but I want to sell it in 2-3 years to get it into ISA and SIPP as soon as possible. I’ve just worked out how to avoid CGT: sell an ISA/SIPP gilt index fund and buy the same equity tracker; sell the unwrapped equity tracker and buy low coupon nominal gilts that match the gilt index fund like a mix of TG31 and TG35 (then rebalance the two every couple of years). The problem is I would have to take a one-off CGT hit.

What would you do (assuming CGT rules don’t change – obviously I’ll do nothing before the first Labour budget)? Take the hit; or sit it out and pay the CGT when it falls due or, if markets fall, make the switch without having to pay the one-off hit?

The trend on CGT has been reductions in allowances.  There is no indication from any party that trend will change.

If you have a plan that you think is a good one (I cannot comment on that), it may be worth considering that any incoming Government may not hold a full budget until Spring 2025 by when the time to take advantage of any available allowances within this tax year may have passed.  An incoming Government might well hold a small Autumn Statement as a marker of intent / direction but hold off the full Budget so that they can be more fully briefed on the true state of affairs and have changes modelled by OBR.  This will be presented as "keen to make rapid change, but not at risk of crashing the economy in the meantime".

EthicsGradient

aroominyork said:

HSBC FTSE All World Index. s104 value 215p; current price 250p. I hadn't taken into account dividend tax and will next month receive a £2700 distribution. Should I have sold the day before ex-div and rebought the next day? (Answer: No. A 0.15% overnight unit price rise would more than cover the basic rate dividend tax. Don't try to be too clever.)

In that case I think you will need to sell more than the CGT allowance, and pay some CGT. I think that means roughly your holding is £155k (62,000 units), with a current gain around £21,700. You could sell around £21,500 now with a gain of £3,000 and pay no CGT this year, leaving 53,400 units. But if there's a fairly modest 4% rise in price by the time the next tax year begins, the remaining units would be worth £138,840, with a gain of 45p each - £24,030 - more than your total gain this year. So the gain is likely to get higher and higher, if you just sell the amount to use the CGT allowance, and you may never reach the end that way. It would be better to sell earlier, rather than letting the gain build up.

How much to sell would depend on other circumstances - if you're currently a basic rate taxpayer, it might be worth selling to give you a taxable gain up to the limit of the basic rate band. Whether it could be worth going into the higher rate just to get it done, I don't know. But to be able to eventually move it all into a sheltered account, you'll have to sell enough so that the expected capital growth doesn't outrun the yearly CGT allowance.

It'll take a spreadsheet to work out scenarios. And then revisiting it in each new tax year to put in figures of how the price has actually moved (better to sell at the start of a tax year because, averaged out, the gain is lowest at the start than later, so you make the most of the allowance).

Linton

aroominyork said:

I have a chunk of money in an unwrapped equity tracker. At current valuations it will take 6-7 years to sell it within £3k CGT allowance - longer if markets rise - but I want to sell it in 2-3 years to get it into ISA and SIPP as soon as possible. I’ve just worked out how to avoid CGT: sell an ISA/SIPP gilt index fund and buy the same equity tracker; sell the unwrapped equity tracker and buy low coupon nominal gilts that match the gilt index fund like a mix of TG31 and TG35 (then rebalance the two every couple of years). The problem is I would have to take a one-off CGT hit.

What would you do (assuming CGT rules don’t change – obviously I’ll do nothing before the first Labour budget)? Take the hit; or sit it out and pay the CGT when it falls due or, if markets fall, make the switch without having to pay the one-off hit?

Sorry I am being thick. How does that save you CGT? What goes does messing about with gilts do you?

aroominyork

Thanks Ethics. As you said, if the markets keeps rising I could end up chasing my tail, hence the 'cut and run' theory. This year's CGT allowance is already taken, but thanks for reminding me (and others) that CGT can move you into a higher tax band.

Linton - nominal gilts are not subject to CGT. The only tax you pay is on the income, hence going for low coupon. If you have £100k in a 0.25% coupon gilt it will cost you £50pa in tax (assuming basic rate tax and no PSA).

aroominyork

You’d rather hold equities outside a wrapper than in? Let’s run approx. numbers with the assumptions you pay tax at basic rate with no available allowances for CGT, interest or dividend income.

You start with £100,000 and will draw it after 15 years. Assume equities rise at 8% annually and pay 3% dividend. Unwrapped, your £100k after 15 years is £317k. You pay 10% CGT on £217k = £21.7k. You also pay £7.7k dividend tax over 15 years, so total tax of £29.4k. Net value £317k - £29.4k = £287.6k.

If you move it into a SIPP it is grossed up to £125k. After 15 years it is worth £396k. Although you would probably withdraw it over a number of years let’s assume it is all in one chunk, 25% tax free. You pay tax of £396k*(1-25%)*20%=£59.4k. Net value is £396k-£59.4k=£336.6k. That’s a 17% better outcome. I know which I prefer.

masonic

[Deleted User] said:

Linton said:

Sorry I am being thick. How does that save you CGT? 

I might be being thick too...

Any future gain on the equities no longer has CGT on it (saving 10% or 20% tax).  Instead the gain is in the pension, meaning no tax unless you draw the gain.  When you draw it, the gain (which has been transmogrified into pension income) is taxed at income tax rates (20%, 40% or 45%).  Of course if you can take some of it as PCLS only 75% of the gain is taxed. 

Personally, I'd prefer equity outside of a pension if at all possible (but someone worried about IHT may think different).  But it can be an idea to realise a gain and pay CGT on it now if you can't get higher rate tax relief on pension contributions any other way.

Have you forgotten about tax relief on the way in? Let's suppose a basic rate taxpayer has £10,000 they could pay into a SIPP or invest unwrapped. They invest in growth equities with negligible income for 40 years and end up with a 1000% capital gain over all those years...

Unwrapped: £10,000 x 10 = £100,000, capital gain £90,000, sell 20% (£20,000 with gain £18,000), CGT £1,500 (if the allowance and tax rate stay put), Net amount = £16,500

Pension: £10,000 x 1.25 x 10 = £125,000, capital gain irrelevant, draw down 20% (£25,000 including £6,250 PCLS), BR income tax £3,750 (net £-1,250), Net amount = £21,250

Which is better? If the contributions are made over time via salary sacrifice and/or out of income that would otherwise be taxed at higher rates, and if CGT gets meddled with to make it less generous, things would be even better for the pension route relative to unwrapped.

Even if there was zero growth over that period, on the unwrapped holding there would be no tax to pay, but for the pension there would be net tax relief of £625 to harvest.