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The days of leaving your investments untouched and living off dividends are over

Stocks and Shares ISA , Choosing funds for ISA's, risk factors for funds etc
Investment strategy discussions not dealt with elsewhere.
mickeypops
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Re: The days of leaving your investments untouched and living off dividends are over

#446361

Postby mickeypops » September 29th, 2021, 5:36 pm

dealtn wrote:
Dod101 wrote: I understand the sentiments expressed by simoan but the difficulty as always is knowing how long we are going to live.

Dod


Agreed. So presumably the issue is knowing how much capital to release, and when, to avoid the otherwise unavoidable problem of leaving all that capital for others, and not yourself, to enjoy once you die. Or are those income only investors happy with such an outcome?


Yes, I’m happy with that outcome. Just under half of our retirement income comes from a portfolio of high-ish yielding Investment trusts. We have no plan to touch the capital. I think of it as an annuity that will outlive us and be of benefit to our daughter and her children.

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Re: The days of leaving your investments untouched and living off dividends are over

#446362

Postby GoSeigen » September 29th, 2021, 5:40 pm

88V8 wrote:
HYP... was supposed to be fire-and-forget. A 'TR' strategy where one periodically has to sell stuff, that's more like having to make one's own gunpowder. HYP can be a hobby as well as an income strategy, I suppose TR is another hobby. We all need hobbies.

V8


Agree with dealtn, this is a strange distortion of what Total Return means. It's nothing to do with periodically selling stuff. It is about taking a view on sale vs purchase price of an investment in addition to income, rather than only focussing on income and ignoring price. In other words it's about believing income cannot be valued independent of price. Otherwise why not just put all your money into pyramid schemes, preferably the ones that offer a 100% income per week or thereabouts? I've never heard of a pyramid scheme where you do not "buy and forget" -- forget is pretty much forced upon you!


GS

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Re: The days of leaving your investments untouched and living off dividends are over

#446540

Postby 1nvest » September 30th, 2021, 11:56 am

88V8 wrote:HYP... was supposed to be fire-and-forget. A 'TR' strategy where one periodically has to sell stuff, that's more like having to make one's own gunpowder.

Better to make your own gunpowder to the amounts and times needed, rather than having gunpowder delivered in quantities and times that someone else defines.

All else being equal the overall total return will still be the same, bar those that make their own however being more efficient, not having to concern themselves with too little or too much having been delivered and/or at the wrong times as in the case of the 'supplied' gunpowder.

Itsallaguess
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Re: The days of leaving your investments untouched and living off dividends are over

#446549

Postby Itsallaguess » September 30th, 2021, 12:12 pm

1nvest wrote:
88V8 wrote:
HYP... was supposed to be fire-and-forget. A 'TR' strategy where one periodically has to sell stuff, that's more like having to make one's own gunpowder.


Better to make your own gunpowder to the amounts and times needed, rather than having gunpowder delivered in quantities and times that someone else defines.

All else being equal the overall total return will still be the same, bar those that make their own however being more efficient, not having to concern themselves with too little or too much having been delivered and/or at the wrong times as in the case of the 'supplied' gunpowder.


BINGO!

  • You're an income-investor, so if you're going out for a family meal on Saturday night, then the whole event will be spoilt if you don't receive a large enough dividend on Friday with which to pay for it...

https://www.lemonfool.co.uk/viewtopic.php?t=30710&start=100#p434576

Ah, those McGuffins......where would we be without them....

Itsallaguess

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Re: The days of leaving your investments untouched and living off dividends are over

#446643

Postby MDW1954 » September 30th, 2021, 3:44 pm

Moderator Message:
A sure sign that threads are becoming a little intemperate is a slew of reports, and words like 'trolls' being bandied about. The title of this thread is already inflammatory enough without posters adding to the flames. I suggest calmer and more considered posting, or the thread runs the risk of being locked. --MDW1954

88V8
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Re: The days of leaving your investments untouched and living off dividends are over

#446673

Postby 88V8 » September 30th, 2021, 4:50 pm

MDW1954 wrote:
Moderator Message:
A sure sign that threads are becoming a little intemperate is a slew of reports, and words like 'trolls' being bandied about. The title of this thread is already inflammatory enough without posters adding to the flames. I suggest calmer and more considered posting, or the thread runs the risk of being locked. --MDW1954

No, no, we have to keep it going until the 5th November :)

V8

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Re: The days of leaving your investments untouched and living off dividends are over

#447080

Postby moorfield » October 1st, 2021, 8:06 pm

MDW1954 wrote:
Moderator Message:
A sure sign that threads are becoming a little intemperate is a slew of reports, and words like 'trolls' being bandied about. The title of this thread is already inflammatory enough without posters adding to the flames. I suggest calmer and more considered posting, or the thread runs the risk of being locked. --MDW1954



As the OP I think I should say the the title of this thread was not inflammatory. It was a quote from The Sunday Times intended to generate debate, and I thank the contributors to this thread for their views. I am minded to report your accusation but will let it pass this time, however next time you accuse me of posting quotes from newspapers as inflammatory, I will.

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Re: The days of leaving your investments untouched and living off dividends are over

#447824

Postby Eboli » October 4th, 2021, 6:02 pm

Arb additionally noted that my conclusions on the excess burden of IHT were

... [a} perverse and unnatural statement. Every person has the right to accumulate and pass on his wealth - it is a sacred duty to improve the lot of one's family. All you are saying is that you want to dip your hand into someone's pocket because you can - this is legalised robbery. Otherwise known as the politics of envy.


Nothing perverse and unnatural about it at all! It is simply a statement of fact that if you do not alter your behaviour with regard to the consumption of capital then there is no excess burden caused by behavioural changes if the rate of IHT is increased. The same would be true, for example, of a Land Value Tax. Everything else you say is simply non sequitur and emotive.

Pace!

Eb.

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Re: The days of leaving your investments untouched and living off dividends are over

#447832

Postby Lootman » October 4th, 2021, 6:33 pm

Eboli wrote:Arb additionally noted that my conclusions on the excess burden of IHT were
... [a} perverse and unnatural statement. Every person has the right to accumulate and pass on his wealth - it is a sacred duty to improve the lot of one's family. All you are saying is that you want to dip your hand into someone's pocket because you can - this is legalised robbery. Otherwise known as the politics of envy.

Nothing perverse and unnatural about it at all! It is simply a statement of fact that if you do not alter your behaviour with regard to the consumption of capital then there is no excess burden caused by behavioural changes if the rate of IHT is increased. The same would be true, for example, of a Land Value Tax. Everything else you say is simply non sequitur and emotive.

History tells us that any tax rate much in excess of 40% (Laffer's sweet spot, perhaps?) causes an uptick in avoidance and evasion. So other than a 45% top rate of income tax that few pay, there is no tax rate I know that is more than 40%(*). That is a particularly punitive rate where it is wealth being taxed, rather than just the value of a profit or transaction.

Of course if the government really thought that IHT was a justified tax then they would make it much harder to avoid. Right now, only the indifferent, unprepared, childless or prematurely dead folks pay it.

(*) A few anomalies with the phasing out of allowances might exceed that rate for a portion of income.

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Re: The days of leaving your investments untouched and living off dividends are over

#447836

Postby scrumpyjack » October 4th, 2021, 6:50 pm

Lootman wrote: Right now, only the indifferent, unprepared, childless or prematurely dead folks pay it.


I think that is overstating it. Most people find it hard to estimate reasonably accurately when they will die, seven years in advance, and divest themselves of assets in order to be sufficiently impoverished when they die to avoid IHT. That may be the case in the USA where the tax free allowance is $11.5 million (or $23 million for a married couple), but not in this country. One also has to trust and have faith in ones children which may not always be the case, and then there is the issue of CGT which may be triggered by gifts so inhibiting some from giving.

I'm not sure quite why, but IHT seems to stir up resentment in many people. My view is that it is a reasonable tax, given that we have to have tax, but would be much fairer if at a much lower rate but without all the exemptions that enable its avoidance (business assets, farmland, AIM shares etc etc)

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Re: The days of leaving your investments untouched and living off dividends are over

#447843

Postby Lootman » October 4th, 2021, 7:02 pm

scrumpyjack wrote:IHT seems to stir up resentment in many people. My view is that it is a reasonable tax, given that we have to have tax, but would be much fairer if at a much lower rate but without all the exemptions that enable its avoidance (business assets, farmland, AIM shares etc etc)

I cannot speak for others but for me it gets my goat more than any other tax, even though by definition I will never have to personally pay it.

As you say, if it was reduced to 10% and every estate had to pay it with no exemptions, then that could be a viable alternative approach. Or leave it like it is now with a high rate and we all jump through hoops to avoid it. Although in my case that is not so much through business assets, farmland and AIM shares, but rather through PETs, conspicuous consumption and a probable emigration at some point.

Or as you note raise the nil rate band to something closer to the US number you cited, which would take IHT back to its roots as a tax on the super wealthy rather than on anyone who owns a house in most of the country.

In investment terms it means to me that merely spending the income whilst growing a pot that will be taxed at 40% is not an appealing option.

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Re: The days of leaving your investments untouched and living off dividends are over

#448151

Postby Eboli » October 5th, 2021, 7:34 pm

Lootman commented:

History tells us that any tax rate much in excess of 40% (Laffer's sweet spot)


Not so. Extensive research by Professor Robert Lindsay and others (Showdown at Gucci Gulph) suggests that, for example, CGT has an optimal revenue rate of around 16.4% and this has been confirmed by much UK research subsequently. Indeed, it is the reason why Alistair Darling (remember him?) set the CGT rate at 18% until George Osborne b******d the whole thing up again! That 18% wasn't plucked out of the air, you know.

I do agree with scrumpyjack that

...[it) would be much fairer if at a much lower rate but without all the exemptions that enable its avoidance (business assets, farmland, AIM shares etc etc)


Indeed. A simple share farming agreement by which the owner of land simply walks over the land farmed by his share farmer yields 100% relief on agricultural value and makes the land qualify for 100% relief though to all reality farmed by the share farmer. But it gets better as land to which the farmhouse (read nice manor house) is of a character appropriate to the land that now qualifies (IHTA 1984 s 115(2)) also qualify for 100% relief. Somewhat better than that portfolio of AIM shares that qualify for business property relief as those pesky things are risky!

I repeat my previous statement on IHT has little to do with its efficacy or its ethics but rather if posters here are willing to admit that it has little of no behavioural effect then the excess burden of the tax must be very small and this is a good reason ceteris paribus for a high rate of tax because the optimal revenue raising rate of the tax could well be 80%.

Eb

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Re: The days of leaving your investments untouched and living off dividends are over

#448170

Postby Lootman » October 5th, 2021, 9:14 pm

Eboli wrote:Lootman commented:
History tells us that any tax rate much in excess of 40% (Laffer's sweet spot)

Not so. Extensive research by Professor Robert Lindsay and others (Showdown at Gucci Gulph) suggests that, for example, CGT has an optimal revenue rate of around 16.4% and this has been confirmed by much UK research subsequently. Indeed, it is the reason why Alistair Darling (remember him?) set the CGT rate at 18% until George Osborne b******d the whole thing up again! That 18% wasn't plucked out of the air, you know.

The optimal rate of CGT greatly depends on whether there is indexation of gains. CGT rates were greatly reduced because indexation went away. Which makes a mockery of the idea from some quarters that it should be taxed as ordinary income.

That said CGT is not a great concern for me, even though i annually pay quite a bit of it. The relatively low rate at which it is applied (actually 0% through 10% to as high as 28%) ensures that there is less motivation to avoid or evade, as per Laffer.

Eboli wrote:I do agree with scrumpyjack that

...[it) would be much fairer if at a much lower rate but without all the exemptions that enable its avoidance (business assets, farmland, AIM shares etc etc)

Indeed. A simple share farming agreement by which the owner of land simply walks over the land farmed by his share farmer yields 100% relief on agricultural value and makes the land qualify for 100% relief though to all reality farmed by the share farmer. But it gets better as land to which the farmhouse (read nice manor house) is of a character appropriate to the land that now qualifies (IHTA 1984 s 115(2)) also qualify for 100% relief. Somewhat better than that portfolio of AIM shares that qualify for business property relief as those pesky things are risky!

I repeat my previous statement on IHT has little to do with its efficacy or its ethics but rather if posters here are willing to admit that it has little of no behavioural effect then the excess burden of the tax must be very small and this is a good reason ceteris paribus for a high rate of tax because the optimal revenue raising rate of the tax could well be 80%.

Except that IHT has a huge behavioural effect. People likely to be affected jump through hoops to avoid it. I recall a survey recently that concluded that it was the most despised tax, even though most people do not pay it, and certainly nobody who is alive.

I am absolutely determined to avoid it, not merely because it is a tax on money that has already been taxed, but because it is blatant confiscation.

So I admit nothing of the sort.

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Re: The days of leaving your investments untouched and living off dividends are over

#448198

Postby Howard » October 6th, 2021, 12:47 am

Lootman wrote:
I am absolutely determined to avoid it, not merely because it is a tax on money that has already been taxed, but because it is blatant confiscation.


Out of genuine interest, how are you going to avoid it?

Obviously one can give away a lot to children for house purchases and investments etc (did that over seven years ago) and give a lot to charity. Living in a pleasant area within an hour's train journey of London, a rocketing house price makes the future tax bill even higher if one doesn't want to move. And investment returns have also been kind, adding to the nice problem.

Looking at anything other than bare trusts for grandchildren is complicated and expensive (I'd rather pay the tax than exorbitant fees to wealth managers).

Possibly emigrating?

I haven't really come up with a good solution.

regards

Howard

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Re: The days of leaving your investments untouched and living off dividends are over

#448207

Postby Eboli » October 6th, 2021, 7:29 am

Lootman said:

The optimal rate of CGT greatly depends on whether there is indexation of gains. CGT rates were greatly reduced because indexation went away. Which makes a mockery of the idea from some quarters that it should be taxed as ordinary income.


Strangely, there is no evidence - unless you know otherwise - that the optimal revenue-raising rate of CGT depends on the amount of the nominal gains that are taxed (and remember individual gains have not been indexed since 1992 in the UK and prior to that there was three types of indexation, one based on historic cost, one based on value at 31st March 1982, and one based on a horrible complicated 'kink testing' that was operated from 1985 to 1988). I agree that capital gains should not be taxed as ordinary income but that has nothing to do with what is the optimal revenue raising rates of tax. Corporate indexation, of course, continued until recently.

Lootman additionally added

Except that IHT has a huge behavioural effect. People likely to be affected jump through hoops to avoid it.


Yes, that is always what I thought. But my originally comments were directed not at your view but on those expressed by Arb and others that suggested that for them such expected behavioural effects were not so obviously material. Before I read them I always used to believe in the ditty first expressed by the late Roy Jenkins that IHT was "...a voluntary levy paid by those who distrust their heirs more than they dislike the Inland Revenue."

I do not think - except over fiscal details of little consequence here (and I am mindful of going off topic) - that there is much between us, Lootman.

Eb

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Re: The days of leaving your investments untouched and living off dividends are over

#448217

Postby scrumpyjack » October 6th, 2021, 8:43 am

There is obviously a reluctance to pay a tax where the taxpayer feels the rate of tax (after any allowances such as indexation) is unfair and excessive and where the taxpayer can decide whether to trigger a taxable event. My understanding is that these factors were considered by the Treasury when indexation was abolished and it was decided that the ‘optimum’ rate of CGT was not more than 28% otherwise less revenue would be raised due to taxpayer reluctance to trigger CGT.

Certainly my own attitude is that paying some CGT is fair enough, but paying tax on a gain that is entirely notional, because the asset concerned has simply kept pace with inflation and so no ‘real’ gain has been made, is very irritating and ‘unfair’.

Incidentally I remember as a child meeting Roy and his wife Jennifer quite often as we lived near them and played with his children. He was a very genial man but could not pronounce his 'r' hence was called Woy!

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Re: The days of leaving your investments untouched and living off dividends are over

#448221

Postby Dod101 » October 6th, 2021, 9:07 am

Howard wrote:
Lootman wrote:
I am absolutely determined to avoid it, not merely because it is a tax on money that has already been taxed, but because it is blatant confiscation.


Out of genuine interest, how are you going to avoid it?

Obviously one can give away a lot to children for house purchases and investments etc (did that over seven years ago) and give a lot to charity. Living in a pleasant area within an hour's train journey of London, a rocketing house price makes the future tax bill even higher if one doesn't want to move. And investment returns have also been kind, adding to the nice problem.

Looking at anything other than bare trusts for grandchildren is complicated and expensive (I'd rather pay the tax than exorbitant fees to wealth managers).

Possibly emigrating?

I haven't really come up with a good solution.

regards

Howard


I am in discussions with my solicitor at the moment on that very topic. The only thing we have come up with apart from giving away more money and hoping I will survive another seven years is to ensure that at least 10% of the taxable estate is given to charity per the Will. That will reduce the taxable rate to 36%. As Howard says, rising house prices, with no benefit to me, keep me having to check that every so often.

As I pay very little tax in life I actually do not mind if my estate pays some on my death. My residual heirs have been quite well looked after for house purchase and so on so they should not mind too much.

Dod

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Re: The days of leaving your investments untouched and living off dividends are over

#448222

Postby scrumpyjack » October 6th, 2021, 9:19 am

Howard wrote:
Lootman wrote:
I am absolutely determined to avoid it, not merely because it is a tax on money that has already been taxed, but because it is blatant confiscation.


Out of genuine interest, how are you going to avoid it?

Obviously one can give away a lot to children for house purchases and investments etc (did that over seven years ago) and give a lot to charity. Living in a pleasant area within an hour's train journey of London, a rocketing house price makes the future tax bill even higher if one doesn't want to move. And investment returns have also been kind, adding to the nice problem.

Looking at anything other than bare trusts for grandchildren is complicated and expensive (I'd rather pay the tax than exorbitant fees to wealth managers).

Possibly emigrating?

I haven't really come up with a good solution.

regards

Howard


I agree that 'Wealth Managers' and trusts other than bare trusts are absolutely to be avoided. I have gone the bare trust route for grandchildren which has the great advantage that they each get a full personal allowance and CGT allowance no matter how young.

I recall an aunt who had a lovely large house on the riverbank near Kew bridge. She gave the house to her sons who then rented it back to her to avoid the reservation of benefit rules. Obviously they had to get an estate agent to assess the rent properly but had some difficulty getting him to understand that they were not looking for the highest rent but the lowest!

Another possible route would be to arrange interest free loans so when you go the valuable house is offset by debt. This would obviously need proper advice to ensure the arrangement works.

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Re: The days of leaving your investments untouched and living off dividends are over

#448251

Postby 1nvest » October 6th, 2021, 11:09 am

Howard wrote:
Lootman wrote:
I am absolutely determined to avoid it, not merely because it is a tax on money that has already been taxed, but because it is blatant confiscation.

Out of genuine interest, how are you going to avoid it?

Obviously one can give away a lot to children for house purchases and investments etc (did that over seven years ago) and give a lot to charity. Living in a pleasant area within an hour's train journey of London, a rocketing house price makes the future tax bill even higher if one doesn't want to move. And investment returns have also been kind, adding to the nice problem.

Looking at anything other than bare trusts for grandchildren is complicated and expensive (I'd rather pay the tax than exorbitant fees to wealth managers).

Possibly emigrating?

I haven't really come up with a good solution.

regards

Howard

£6000 limit of a single year gift allowance (current and past years allowances assuming no other gifts had been made), £9000 if near April, recorded as given as 'coinage cash'. Gold sovereigns are legal tender of £1 value (£100 for one ounce Britannia's), but that have a metallic value of around £320 of recent. Close on £3M metallic value.

Suspect there have been trials/rules for such so as with most 'avoidance' methods there's a grey line between being 'evading' where the rules are set by one of the involved parties and their interest is "legal" theft/confiscation. The skeleton in the Courtroom wont get to hear the outcome.

Including gold as part of a portfolio (US data)

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Re: The days of leaving your investments untouched and living off dividends are over

#448510

Postby hiriskpaul » October 7th, 2021, 11:53 am

scrumpyjack wrote:
Howard wrote:
Lootman wrote:
I am absolutely determined to avoid it, not merely because it is a tax on money that has already been taxed, but because it is blatant confiscation.


Out of genuine interest, how are you going to avoid it?

Obviously one can give away a lot to children for house purchases and investments etc (did that over seven years ago) and give a lot to charity. Living in a pleasant area within an hour's train journey of London, a rocketing house price makes the future tax bill even higher if one doesn't want to move. And investment returns have also been kind, adding to the nice problem.

Looking at anything other than bare trusts for grandchildren is complicated and expensive (I'd rather pay the tax than exorbitant fees to wealth managers).

Possibly emigrating?

I haven't really come up with a good solution.

regards

Howard


I agree that 'Wealth Managers' and trusts other than bare trusts are absolutely to be avoided. I have gone the bare trust route for grandchildren which has the great advantage that they each get a full personal allowance and CGT allowance no matter how young.

I recall an aunt who had a lovely large house on the riverbank near Kew bridge. She gave the house to her sons who then rented it back to her to avoid the reservation of benefit rules. Obviously they had to get an estate agent to assess the rent properly but had some difficulty getting him to understand that they were not looking for the highest rent but the lowest!

Another possible route would be to arrange interest free loans so when you go the valuable house is offset by debt. This would obviously need proper advice to ensure the arrangement works.

Yes, living somewhere owned by your kids is one way to go. However, when I look across my parents in law, uncles and aunts I can see it is not at all unusual for parents to outlive their children. Loans are assets to estates, so not problem free.

The IHT advantages of trusts have been considerably watered down and the larger trusts are subject to 10 year IHT charges anyway. Income and gains in trusts are also taxable. I have reached the conclusion that straightforward gifts that can subsequently be placed in ISAs/SIPPs are better in most instances than trusts. The only advantage of trusts that I can see is with having some measure of control over who gets what and when. Not great tax saving vehicles.

My approach is to stop drawing from our SIPPs and run down other assets instead. First non-sheltered investments, then ISAs. This approach will mean paying an LTA charge at 75, but that is only 25% compared to IHT at 40%. I think of the LTA charge as clawing back previously claimed tax relief, which softens the blow a little.

Property is the big problem. Selling up, giving the money away and then renting seems like the only answer, but I hate the thought of becoming a tenant again. Maybe equity release if it can be done at a rate that is not exhorbitant. Risky though if interest rates shoot up.


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