Would you (should I) take a CGT hit?

aroominyork

OH and I have £130k of unwrapped HSBC FTSE All World Index, bought around 215p and now trading at 303p. We've been selling enough each year to use our CGT allowance but (nice problem to have) the paper gain keeps rising. Would you (should I) take a CGT hit and make larger sales? Assume I can reinvest it tax-wrapped (I would use ISA allowance and after that buy a low coupon nominal gilt and, in my SIPP, sell a similar duration gilt fund and buy the HSBC fund).

Woodstok2000

If I didn't need the money for something specific, I'd continue withdrawing under the cgt limit for the next 7 years or so until it's all out. Losing £240 out of every £1000 gain would not interest me.

aroominyork

You are assuming the price flatlines for seven years and doesn't keep rising. Also, I pay CGT at 18%, not 24%.

Woodstok2000

https://forums.moneysavingexpert.com/discussion/comment/81919522#Comment_81919522

Good point! So more like 20 years to take it all out tax free assuming 8% growth per annum.

It's expensive to take the money out though - almost £7k in tax this year for a full withdrawal. In 10 years time that'll be over £8k (again at 8% with maxed annual withdrawals).

Will you make that kind of additional profit elsewhere?

phlebas192

https://forums.moneysavingexpert.com/discussion/6659226/would-you-should-i-take-a-cgt-hit

I think I would look to bed & ISA enough each year to maximise that contribution if you don't otherwise have the cash available to do so. I don't think there's much advantage to do anything more complex than that.

nb: whilst you are currently a basic rate tax payer, the 18% CGT rate may not apply to the whole gains if you sell the lot in one tax year. eg if you have £30k in taxable income and realise £37k in gains then £3k is tax free, £20,270 taxed at 18% and the remaining £13,730 at 24%.

aroominyork

https://forums.moneysavingexpert.com/discussion/comment/81919579#Comment_81919579

Yes, 24 years if my calcs are right (unlike the spreadsheet I posted then deleted a few mins ago which was wrong). Although I always use our ISA allowances one way or another, maybe I'll sell £40k worth for an easy Bed&ISA; that is nearly double what I should sell to stay within the £6k CGT limit and will mean a CGT bill of about £1k. I'm conscious that compounding works against me since I make further gains, and potentially pay more tax, on gains that are not withdrawn.

Woodstok2000

https://forums.moneysavingexpert.com/discussion/comment/81919952#Comment_81919952

Yep, that aligns with what i worked out. Interestingly, withdrawing an extra £1000 in gain each year (so incurring £180 in cgt) would halve the withdrawal time to under 12 years.

aroominyork

My spreadsheet shows 22 years for £6k (I was looking at the row number when I said 24 years) and 13 years for £7k. But also, change the annual fund growth from 8% to 9% and the 22 years for £6k becomes 30 years!

aroominyork

I’ve realised I should take a CGT hit. Until my SP kicks in during 2028-29, and with just a few £k of earned income, I am only drawing enough from my SIPP to creep just over my personal tax allowance so that I can hold a fair bit of cash in unwrapped two year fixed term deposits and not have to pay tax on interest up to £6k. OH’s pensions/income already take her over her personal allowance so we can draw from her SIPP up to the top of the basic rate band. Once my SP kicks in I expect also to draw from my SIPP to the top end of the basic tax band, so any capital gains over the £3k allowance would be taxed at the higher rate (though I realise the 18%/24% differential is less catastrophic than 20%/40% income tax). So it makes sense to take most of the CGT hit over the next couple of years and ensure we feed can £40k pa into our ISAs (as phlebas192 suggested).

Dead_keen

I would put £40k per year into an ISA each tax year and pay the CGT on those shares. I'd utilise the no-gain, no-loss transfer of sufficient shares to your OH if married / civil partner to utilise both CGT annual exemptions.

Why?

1. Gut feel
2. Easier on my mind (I'm rich but can't spend it / buy that new car as I will have to pay CGT, I'm rich but don't want to pay CGT but I'd like to give it to the kids now to mitigate IHT),
3. CGT rates now may be a lot lower than in future (e.g. if CGT rates are aligned to income you lose out big time).

So while I can create a pretty chart showing sell sufficient to use all your annual exemption is better up to the point you die, I think the behavioural things mean that putting it in an ISA as soon as possible wins in real world scenarios.

aroominyork

Totally agree, Dead_keen. And I like following a logical process which takes the market timing/what ifs out of the equation.