Tax and Profits

20122013

I have posted about how to make my money (all within ISA) work best for me - thank you for all the helpful replies, that was more straight forward for me as it was all tax free. 

However, as I have now used up my ISA allowance and I do not have 'partner/ spouse' to split the allowance'.  I need to rethink of my options. As I will be getting a moderate sum of money  (£320K gross) from the sell of my property which will be liable to tax (and CGT) or maybe I should not think about taxes but focus on the returns?

As I do not require access for 14 years and am a basic tax payer (no paid work and no other income apart from some savings interest). The options I know of :

1. Index fund

Putting it all in one current index fund and move it slowly to each year's ISA allowance it will take 15 years (?) to sell down and buy back as S&S ISA but then it will incur CGT every year.  I am not sure whether moving to S&S ISA / tax free outweighs the CGT due.

or I can leave it invested for 14 years and sell when I need the funds and pay the CGT when due. 

It is about £5 / transaction.I will need about £20.000 pa. net

2. Savings accounts 

As I understand I have income tax personal allowance of £12570 pa. I will only need to pay tax on the interest and I can move the funds year by year to ISA

3. Annuity

Wait till I reach the age then buy Annuity but there will still be tax to pay and lots to think about as I understand I will get a fix income but cannot 'cancel once bought' ie no refunds

4. GIlts 

I am not sure to invest in it at the moment, I should as the UK government is borrowing a lot more  so it should be a good investment. But I do not find reading easy and there are a lot of numbers to choose which Gilt  to invest so it is putting me off.  

5. Pension

I may find a paid job with pension  and do a salary sacrifice and pay some of this money into it and live off my savings? I will have access to my pension age 65 still ok as I do not need access to this money for 14 years 

There is a lot to understand about each option plus the tax and CGT. 

EthicsGradient

"am a basic tax payer (no paid work and no other income apart from some savings interest)"
Has that "some" savings interest" exceeded the £12,570 PA - and perhaps over the £1,000 PSA and £5,000 zero rate band for savings for those without other income?

It sounds like you're saying you need £20k net income pa. You could, on top of that, contribute £20k to an S&S ISA each year, and £2,880 to a pension (even if you're not earning). So that would be withdrawing about £43k each year. That would go through the £320k to getting what's  left in tax shelters in much less time - 9 years, perhaps. You could set up a gilt ladder to provide that £43k each year (or with approximate amounts when available gilts mature), though, since the yieldgimp site made you sign on to see its figures, I'm not sure how gilt yields for low-coupon gilts held to maturity compare with simple fixed term savings accounts. But if there's still a lot of room between your current savings income, and the £18,570 limit, you may be able to get a lot of interest tax-free anyway.

You could invest a bit in an index fund, and save  the rest in fixed-term savings, and then cash in the index fund a bit at a time to keep within the £3k CGT allowance (eg in year 1, if it grows 7%, you can cash in £45,857, which is an initial investment of £42,857 that grew by 7%, and happens to be about what you'd want for income+ISA contribution+pension contribution; in subsequent years you'll be able to cash in smaller and smaller amounts before CGT, but you could probably start with £100k or more invested and still cash it all in over the 14 years without paying any CGT. You'd withdraw from the savings each year to make up the £43k per year.

dunstonh

As I do not require access for 14 years and am a basic tax payer (no paid work and no other income apart from some savings interest). The options I know of : 

Some of the options you mention are tax wrappers. Some are investment types.

For example, index funds, gilts and cash can all be held in a pension or other tax wrappers or held unwrapped.

There is also the investment bond tax wrappers.  No CGT or dividend tax on those but they are assessed on income tax when you draw on them.  If you have low/no income, then an offshore bond with draws whilst you are a non-taxpayer to fund annual ISA & pension and income need along with a bit of GIA to use CGT allowances could be very effective.

20122013

@EthicsGradient

     "am a basic tax payer (no paid work and no other income apart from some savings interest)"

Has that "some" savings interest" exceeded the £12,570 PA - and perhaps over the £1,000 PSA and £5,000 zero rate band for savings for those without other income?

     20122013 : My taxable savings will earn about (maximum) £3,110.59 net interest pa and as  from 1/2019 this will go down each year by £20,000 to refill my cash Ladder (if my calculation works out I will spend more). So I will take 'approx. £3110 from  £12,570 PA and perhaps over the £1,000 PSA and £5,000 zero rate band for savings for those without other income.'  I will work out the sums more regularly. 

     It sounds like you're saying you need £20k net income pa. You could, on top of that, contribute £20k to an S&S ISA each year, and £2,880 to a pension (even if you're not earning). So that would be withdrawing about £43k each year. That would go through the £320k to getting what's  left in tax shelters in much less time - 9 years, perhaps. You could set up a gilt ladder to provide that £43k each year (or with approximate amounts when available gilts mature), though, since the yieldgimp site made you sign on to see its figures, I'm not sure how gilt yields for low-coupon gilts held to maturity compare with simple fixed term savings accounts. But if there's still a lot of room between your current savings income, and the £18,570 limit, you may be able to get a lot of interest tax-free anyway.

     20122013 :  As I have mentioned above, I have spending till 1/2029, in the meantime, I have your suggestion of 'contribute £20k to an S&S ISA each year, and £2,880 to a pension' So I'd be withdrawing about £23k each year. 

     You could invest a bit in an index fund, and save  the rest in fixed-term savings, and then cash in the index fund a bit at a time to keep within the £3k CGT allowance (eg in year 1, if it grows 7%, you can cash in £45,857, which is an initial investment of £42,857 that grew by 7%, and happens to be about what you'd want for income+ISA contribution+pension contribution; in subsequent years you'll be able to cash in smaller and smaller amounts before CGT, but you could probably start with £100k or more invested and still cash it all in over the 14 years without paying any CGT. You'd withdraw from the savings each year to make up the £43k per year.

     20122013 : Great thinking! As I am currently cash heavy and plan to keep 5 year cash and invest the rest along with fund from the property sell.  So where possible I will always use the cash first and use the ISAs funds later. I did think about investing some and the rest in fixed-term savings, however, I am going to get another lump sum in 12 months and I will continue with this process.  

I will check out the gilt ladder and understand coupons etc, and look for short dated /term ones.  

I will aim to always have 5 year cash available, and this idea of investing all my spare cash into index fund and then pay CGT when I need to take an income from it yearly? eg £20K Net p/a? would I have paid more CGT? but I am thinking may be wise to spread it in different 'asset' so Gilts? and move it to ISA each year as you have mentioned, but also thinking don't let tax dominate my investment plan.

20122013

@EthicsGradient I want to check my plan (taking some ideas with your reply)

All the sell proceeds to invest in a Gilt ladder, then and work out how much I can withdraw each year with no / minimum tax / CGT.  Then put £20K to ISA and £20K spending money and then £2880 pension and any left over either spend or reinvest back to Gilt. I need to work out which Gilt to buy and get the timing for the maturity or sell right. and keep repeating this cycle. 

EthicsGradient

Hi,
with about £3,000 in current interest, you have another £15k or so that you can earn in interest before you'd pay tax on it. This would mean that the interest on fixed term savings accounts can be directly compared with the yield on gilts - and up to 5 years, the savings accounts, at about 4.4% or 4.5%, are currently better than gilts at about 3.8%:
Best savings accounts: 5% easy access or 4.62% fixed rate
UK Gilt Prices and Yields
(£320k at 4.5% would be £14,400 interest per year)
So you could use fixed term accounts up to 5 years, and a gilt ladder for the years after that. (Though if you did find a job after all, you would start paying tax on the interest from the accounts, and the return from low-coupon gilts held to maturity, which is mainly tax-free capital growth, might start to look more attractive).

Though your last post sounds like you're thinking of just using your £20K ISA  and £2880 pension as a yearly investment into index funds, you could consider putting a bit of your lump sum now into index funds held outside the ISA/SIPP, and then transferring the yearly investment across from there - after a few years, the amount you could transfer this way without paying CGT would be limited, but you could top up the funding from your fixed-term/gilt ladder. eg
year 1 £80k in unsheltered index fund, grows to 85k
year 2 withdraw 23k for ISA/SIPP (cap gain well under 3k so no CGT), 62k left which grows to £65.5k
year 3 withdraw 23k for ISA/SIPP (cap gain about 2.5k, so still no CGT, but not far off), £42.5k left which grows to £45k
year 4 now withdraw what has 3k cap gain - about £18,900 (so you need about 4k from savings to make the maximum ISA/SIPP contribution , £23,600 left
It would then take another couple of years to withdraw it all, without paying CGT.

This would have the advantage of getting more of your lump sum in investments (which, over the long term, have normally done better) earlier - but you'd still only be starting with 25% in investments, which is not a great risk. I reckon you might well be able to start with £100k invested in an index fund, and still move it into the ISA/SIPP without having to pay CGT.

20122013

@EthicsGradient - appreciate this. it will be very useful to me.

So if saving rates (currently) are better than Gilts - I should keep it in savings as hopefully not much tax on interests rates.  Even I start a job later (really is to join the pension and max out of the salary sacrifice, ok if I am not able to accessible it till 67..) as it will only be about £600 pa + salary sacrifice.

Thanks for writing it up - feel more confident with the plan.

I will do all of the above if I can.  I already have one index tracker fund and i keep rotating back to it.  And think about multi asset fund but it will be a combo of index tracker and gilts? so hence I rotate back to index tracker need to check out what other type of index tracker funds are available. 

Also, with UK Gilt Prices and Yields  

I would like to get to know Gilts better and feel okay with numbers. So from what I understand about Gilts:

- Best not to buy as funds

- Better not to get dirty price (as harder to sell on?)

- Look for 1 - 2 year maturity date (as higher risk if term is longer) ?

- There is no maximum limit of how much I can buy?

The difference between Treasury Gilt and Treasury Stock:

note to self understand this , please: https://www.dmo.gov.uk/responsibilities/gilt-market/about-gilts

EthicsGradient

I don't use gilts myself, but it's definitely an area that you should understand fully before committing money to. There is, for instance, a lot of difference between buying high-coupon (ie the nominal interest) gilts with the expectation of selling them at a profit because you think interest rates will drop, or buying low-coupon gilts with the intention of holding them to maturity, to give you a known return at a fixed time in the future (which is what 'gilt ladders' are usually constructed from). 

On salary sacrifice - again, something I've never done myself, but I believe that you can't use salary sacrifice that ends up making your actual pay below the minimum wage. You are allowed to contribute your entire salary before income tax to a pension (ie if your pre-income tax salary is £20,000, you can contribute £16,000, and HMRC will put in £4,000 as tax relief), but the specific wheeze of 'salary sacrifice' - that your employer funds the pension without either of you paying National Insurance, and without you paying income tax - can't be done on the entire amount.

20122013

@EthicsGradient

Food for thought. I will be sure to understand more about gilts etc, look into your replies again and  review my cash ladder again, and calculations

DRS1

"I would like to get to know Gilts better and feel okay with numbers. So from what I understand about Gilts:

- Best not to buy as funds

- Better not to get dirty price (as harder to sell on?)

- Look for 1 - 2 year maturity date (as higher risk if term is longer) ?

- There is no maximum limit of how much I can buy?"

Correct best not to buy as funds - for one thing the tax treatment is not the same. 
Dirty prices are hard to avoid.  You can only buy a gilt at the dirty price.  That can be awkward especially if you buy index linked gilts where the dirty price is a lot higher than the clean price.  For normal gilts it is more a case of paying for accrued interest.
The clean price is useful to measure what gain you are likely to make on maturity or whether you will make one.  The lower the clean price is the more gain and if the clean price is over 100 then you will make a loss.
Short maturity can be handy but if you are building a gilt ladder as suggested then you will have maturities stretching out over more years than that (5 to 14 years maybe)  There is a useful tool here (don't ask me how to use it)
 Gilt Ladder Builder · Streamlit
You can buy as much as you want but if you want to be getting a return of £43k pa then feed that into the thing I have linked and it should tell you how much you need to buy of each gilt to get that.