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Best Way to Tax Efficiently Invest Bigger Lump Sums

Living off (accumulated) wealth and savings - Fools of Leisure
AWOL
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Best Way to Tax Efficiently Invest Bigger Lump Sums

#429460

Postby AWOL » July 21st, 2021, 10:29 pm

I can see why taking the 25% tax free lump sums in stages would enable one to squirrel it away using the annual ISA allowance. However if I have little faith in governments (or voters) so consequently before entering drawdown I may take all of the 25% tax free lump sum, say a sum of £300k for the sake of argument.

Where should I shelter it from taxation (and less importantly from stupid bureaucratic things like equalization payments)? I suspect that I am down to 50k into PBs and then 20k a year into ISAs meaning taking it all at once is a pain because it means tax returns, reporting capital gains and other bureaucracy that I cannot be bothered with for a long time to come.

Is there something tax efficient that can be done with bonds? I have never bought a bond other than as part of a fund and am only interested in government bonds as ballast and see corporate bonds as equity like risk for modest returns.

I could use the bonds to reduce sequence of returns risk.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429464

Postby AWOL » July 21st, 2021, 10:47 pm

actually £200k would be a more sensible number as £300k triggers life time allowance discussions.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429521

Postby DrFfybes » July 22nd, 2021, 9:05 am

2/3 of tax revenue is from IT, NI, and VAT, so a small tweak there is a big gain for the govt. Then comes Council Tax and Business rates making another 10%, whereas Stamp Duty, CGT and IHT combined are less than 5%.

Predicting future tax legislation is pretty much impossible, but I suspect the govt will go for strategies like freezing allowances and small increases to Duty and perhaps NI, reduction in higher rate tax relief into pensions, etc. Soft targets. A large scale attack like scrapping ISAs would affect ehough people to lose them an election.

Personally I'm inclined to go with the condiions and keep an eye on the proposals.

Paul

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429546

Postby xxd09 » July 22nd, 2021, 10:13 am

I took my 25% tax free allowance on retiral-parked it in a high interest bs account and lived on it for a few years leaving ISAs and SIPPs to grow-that was 18 years ago however and I was 57-no income except for bs interest which was 3-5% in these halcyon days
By the time I came to drawdown some years later my SIPP was back to its original levels !
xxd09

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429553

Postby ayshfm1 » July 22nd, 2021, 10:32 am

Let say a cap 267K, as that's about the max before the lifetime allowances come into play.

I'm also interested in some clever wheeze here. I don't trust the Government so will definitely take the full 25% when I can. Current plan is a variant on xxd09's. Buy 50K of PB, put 20K per year into ISA, take circa 12K out of the SIPP per year then chuck the rest into my current account live off the money. It could last as much as 10 years depending on how profligate I end up being.

Which boils down to a deeply unsatisfactory plan that I haven't been able improve upon.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429596

Postby TUK020 » July 22nd, 2021, 11:56 am

ayshfm1 wrote:Let say a cap 267K, as that's about the max before the lifetime allowances come into play.

I'm also interested in some clever wheeze here. I don't trust the Government so will definitely take the full 25% when I can. Current plan is a variant on xxd09's. Buy 50K of PB, put 20K per year into ISA, take circa 12K out of the SIPP per year then chuck the rest into my current account live off the money. It could last as much as 10 years depending on how profligate I end up being.

Which boils down to a deeply unsatisfactory plan that I haven't been able improve upon.


Variation on a theme:
Park 50% of the rest in a current account to live off (together with 12k from SIPP), and then buy a basket of global growth ITs with the remaining 50% in a General Investment Account (taxable).
Each year sell down 20k (will keep you within CGT limits) to transfer into your ISA.

You should then not be fussed about market timing up/down as your sales in GIA would roughly match purchases in the ISA. But it means you are holding more in equities/less in cash in the longer term.
Global Growth ITs will generate some dividend income in the GIA which would be subject to income tax, but this would be small scale.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429691

Postby Degsy67 » July 22nd, 2021, 4:13 pm

I also quite randomly started to think about this yesterday. Haven’t worked through any details as yet but 25% of £1m is £250k. Too much to put into ISAs in one year - would take over 6 years for a couple to move this completely into ISAs at £40k per year.

Putting £250k into two dealing accounts (his & hers, £125k each), sticking it all in a simple accumulating global ETF such as HMWO, if this returns an average of 5% growth then that’s £6,250 x 2 per year. Individuals have an annual capital gains allowance of £12,300. So there may be an option here to use a capital gains tax harvesting approach to sell down the capital over time without paying tax.

£12,300 growth on £125k is 9.8%. Happy days. In years where there is a drop in value rather than a gain, you could potentially choose to move the maximum amount of £20k into each ISA. Selling, moving the cash and then rebuying inside the ISA, means only being out of the market for a few minutes so the impact is negligible. This could however generate a capital loss in the current tax year. This loss however can be carried forwards into subsequent tax years and used to reduce future taxable gains.

If you chose to put the 2 x £125k into a fixed income ETF such as VGOV or INXG in a dealing account, these would generate dividends outside of a tax wrapper shelter. Yields on VGOV/INXG are around 0.25%-1.15% (based on current quoted yields). At 1.15% this generates dividend income of 2 x £1,438. Everyone has a separate dividend tax allowance of £2,000 per year. This is distinct from your personal tax allowance. This should mean that the income generated would be tax free even though the capital is sat outside of an ISA or SIPP.

If you put the 2 x £125k into an income generating equity based holding then it needs a bit more thought. 3% - 4% yield outside of a tax wrapper. 2 x £3,000-£5,000 per year. First £2k uses up the dividend tax allowance. Remainder starts to use up personal allowance. Still an opportunity to use capital gains tax harvesting for the capital growth over time. But this approach is like HMRC giving you 2 x £2,000 additional tax free allowance. Just need to manage the tax situation carefully to optimise and legitimately minimise the tax to be paid by maximising available tax allowances.

I’m not promoting this as a well thought through idea and it would be great for others to throw some rocks at it so I can better understand the risks and downsides etc.

Degsy

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#429711

Postby paulnumbers » July 22nd, 2021, 4:59 pm

Berkshire Hathaway shares?

No worries about receiving a dividend and the tax hassles associated, each year you can sell ~£49k without a requirement to fill out a tax return. (assuming the capital gain isn't higher than the CGT allowance)

Probably won't be an amazing investment, probably won't be a terrible investment, and it will probably outperform bonds.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430005

Postby JuanDB » July 23rd, 2021, 8:56 pm

Degsy67 wrote:If you chose to put the 2 x £125k into a fixed income ETF such as VGOV or INXG in a dealing account, these would generate dividends outside of a tax wrapper shelter. Yields on VGOV/INXG are around 0.25%-1.15% (based on current quoted yields). At 1.15% this generates dividend income of 2 x £1,438. Everyone has a separate dividend tax allowance of £2,000 per year. This is distinct from your personal tax allowance. This should mean that the income generated would be tax free even though the capital is sat outside of an ISA or SIPP.


Is income from bonds considered dividends, or interest?

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430010

Postby TUK020 » July 23rd, 2021, 9:32 pm

JuanDB wrote:
Degsy67 wrote:If you chose to put the 2 x £125k into a fixed income ETF such as VGOV or INXG in a dealing account, these would generate dividends outside of a tax wrapper shelter. Yields on VGOV/INXG are around 0.25%-1.15% (based on current quoted yields). At 1.15% this generates dividend income of 2 x £1,438. Everyone has a separate dividend tax allowance of £2,000 per year. This is distinct from your personal tax allowance. This should mean that the income generated would be tax free even though the capital is sat outside of an ISA or SIPP.


Is income from bonds considered dividends, or interest?

Interest.
However, at current rates, a tax problem should be viewed as a quality problem to have

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430018

Postby Alaric » July 23rd, 2021, 10:15 pm

TUK020 wrote:However, at current rates, a tax problem should be viewed as a quality problem to have


If investing in Corporate Bonds directly, or indirectly by OEICs or ETFs, a return of 4% on £ 25,000 hits the £ 1000 interest limit. By no means risk free to capital both in volatility and potential default.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430554

Postby AWOL » July 26th, 2021, 6:58 pm

I have been trying to reply to this but it hasn't been working!

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430628

Postby Ifnotnow8 » July 27th, 2021, 6:50 am

Are dividends from a general trading account falls within the £2000 dividend tax free allowance per year ?
Please clarify? Thanks

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430644

Postby jonesa1 » July 27th, 2021, 8:45 am

Ifnotnow8 wrote:Are dividends from a general trading account falls within the £2000 dividend tax free allowance per year ?
Please clarify? Thanks


Yes, so long as the payment is classified as a dividend. Funds which hold mainly equities ay dividends, funds which hold mainly bonds pay interest.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430653

Postby JohnB » July 27th, 2021, 9:20 am

If you have a tracker EFT with 3.5% dividends and 3% capital gain. With a £2000 dividends allowance and £12k personal allowance, you can have nearly £400k in a GIA without paying income or capital gains tax. So unsheltered investments are less of a worry than you might think in the 7 years you might take to spend or ISA it all.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430671

Postby moorfield » July 27th, 2021, 10:31 am

Here's a very left field thought but you could "store" the lot in a spread betting account while you then transfer it out over time to other pots ISAs etc.

If you know what you are doing you can trade "1:1" ie. you do not need to use any leverage ie. create the same exposure as you would buying shares outright. Your margin requirements would be covered comfortably. You will pay some funding charges but they can be reduced or offset completely by dividend "credits" on high yield shares.

Any losses would be the same as had you bought shares outright in a trading account, and any gains made would, of course, be tax free.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430725

Postby AWOL » July 27th, 2021, 2:41 pm

Is taking tax free lump sums up front any better for managing the LTA than spreading them out?

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430739

Postby genou » July 27th, 2021, 3:27 pm

AWOL wrote:Is taking tax free lump sums up front any better for managing the LTA than spreading them out?


Depends on individual numbers. Taking the PCLS early removes all the potential growth of that tranche from the pension fund, so helps with LTA. On the other hand, if the LTA is increasing with time ( which it is supposed to start doing again after 5/4/26 ) you may have access to a larger LTA if you wait. I'd reckon a decently invested pension should out-perform LTA uprating, so you need to crunch your own numbers to see what suits you.

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430945

Postby Gengulphus » July 28th, 2021, 12:19 pm

AWOL wrote:I can see why taking the 25% tax free lump sums in stages would enable one to squirrel it away using the annual ISA allowance. However if I have little faith in governments (or voters) so consequently before entering drawdown I may take all of the 25% tax free lump sum, say a sum of £300k for the sake of argument.

Where should I shelter it from taxation (and less importantly from stupid bureaucratic things like equalization payments)? I suspect that I am down to 50k into PBs and then 20k a year into ISAs meaning taking it all at once is a pain because it means tax returns, reporting capital gains and other bureaucracy that I cannot be bothered with for a long time to come.

AWOL wrote:actually £200k would be a more sensible number as £300k triggers life time allowance discussions.

With regard to reporting capital gains, I don't really see the problem, because it doesn't seem at all likely to me that you'll be required to. With a tax-free lump sum of £200k, you could put £50k into Premium Bonds, £20k into your ISA for that year and split the remaining £130k between say five equity investment trusts (*), choosing generalist ones that aren't likely to either rise spectacularly or fall spectacularly. Then in each subsequent year, sell £20k worth of the investment trust that has produced the biggest percentage rise (or all of it if it's been reduced to less than £20k by previous sales, and enough of the next highest-percentage-rise investment trust to make the proceeds up to £20k) and put the £20k into your ISA.

This is unlikely to cause you to have to report capital gains, because (assuming you're entirely UK-based and not making other capital gains by e.g. selling a BTL property) you only have to report them if the total capital gains realised by your sales (without deducting losses realised by them) are over the CGT allowance or the total proceeds of your sales are over 4 times the CGT allowance. But with the CGT allowance at £12.3k, the latter limit is £49.2k and your sales' total proceeds would only be £20k, so you seem highly likely to be OK on the sales proceeds limit. And equally, to make a capital gain of more than £12.3k on a sale whose proceeds are £20k, you would have to have bought the investment trust holding you sold for under £7.7k, so selling it for £20k would involve making a percentage gain of about 160% or more on it. As long as you sell down your best performer first and your worst performer last, it seems unlikely to me that you'll ever find yourself needing to sell from a holding that has made that big a percentage gain. And if by any chance you do, there is the possibility of selling a smaller quantity of the best performer and some of a less good performer (or redeeming some Premium Bonds) to keep the realised capital gain below the CGT allowance while still raising the £20k for the ISA subscription.

I cannot say much about avoiding tax returns, as I'm not familiar with how HMRC deals with pensions in drawdown. I've a vague impression that I've heard somewhere that it's by PAYE: if so, HMRC's usual way of dealing with reasonably small amounts of extra tax is by adjusting the taxpayer's tax code, rather than by requiring a tax return. This is relevant to the above plan because the investment trusts it invests in will probably pay some dividends, and depending on the investment trusts chosen, the dividends on the £130k invested in them might exceed the £2k dividend allowance. Indeed, they could exceed it by quite a bit, but you'll probably want to choose lower-yield investment trusts such as those listed in https://www.theaic.co.uk/aic/find-compa ... desc=false for the plan. (Basically, this is because the plan involves mainly getting your returns on the investments outside ISAs tax-free by using your £12.3k CGT allowance and your £2k dividend allowance, so you want most of them from capital gains rather than dividends.)

There is however little you can do to guarantee that HMRC won't require tax returns... What you can do is keep your investments simple so that completing them if they are asked for is easy (avoiding having to report capital gains does a very large part of that job!), and get them squirrelled away in ISAs as efficiently as possible: if HMRC find that requiring you to complete tax returns and themselves to process them isn't raising much (or quite possibly any) extra tax, they'll soon give up!

(*) Or unit trusts, OEICs or other equity collective investments. Indeed, one can do much the same sort of thing with individual equities and with other investments, but that involves considerably more careful selection of one's sales and I very much doubt that you want the extra complexity that involves...

Gengulphus

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Re: Best Way to Tax Efficiently Invest Bigger Lump Sums

#430947

Postby Alaric » July 28th, 2021, 12:33 pm

AWOL wrote:Where should I shelter it from taxation (and less importantly from stupid bureaucratic things like equalization payments)?


I believe equalization applies only to Unit Trusts and OEICs, but not to Company shares, ITs and ETFs.


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