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

#448736

Postby Eboli » October 8th, 2021, 12:40 pm

Most of the schemes that were used 20 years or so ago to avoid IHTA were shut down not by the 2005 changes to the taxation of trust property within IHT (especially the discretionary trust rules) but rather by the pre-owned asset legislation introduced by FA 2004 Sch 15. Perusal of the official guidance on this will quickly open the eyes of those who have not yet grasped how widely drawn this anti-avoidance legislation is:

https://www.gov.uk/hmrc-internal-manual ... /ihtm44000

The scope of pre-owned assets is breathtakingly wide. It close down all those various 'clever' ways one-time owners of property continued to enjoy use or occupation of part of an asset like land given away by tenancies over part of the property or by enjoying directly or indirectly other assets acquired with the proceeds of the donated property.

Fiscal drag particularly by reference to house price inflation is what has caused IHT to become, more recently, of concern to those with estates that should never be within the scope of this tax.

Eb

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

#448772

Postby Lootman » October 8th, 2021, 3:36 pm

hiriskpaul wrote:My approach is to stop drawing from our SIPPs and run down other assets instead. First non-sheltered investments, then ISAs.

That is a reasonable approach if you are married. The ISA will not attract IHT when it passes to your spouse and, moreover, it can continue with its tax benefits as a spousal ISA.

However for someone who is unmarried I would take a different approach, drawing down the ISA tax free, whilst leaving the assets in a taxable account which under current rules will receive a stepped-up cost basis upon your death.

Eboli wrote:Most of the schemes that were used 20 years or so ago to avoid IHTA were shut down not by the 2005 changes to the taxation of trust property within IHT (especially the discretionary trust rules) but rather by the pre-owned asset legislation introduced by FA 2004 Sch 15. Perusal of the official guidance on this will quickly open the eyes of those who have not yet grasped how widely drawn this anti-avoidance legislation is:

https://www.gov.uk/hmrc-internal-manual ... /ihtm44000

The scope of pre-owned assets is breathtakingly wide. It close down all those various 'clever' ways one-time owners of property continued to enjoy use or occupation of part of an asset like land given away by tenancies over part of the property or by enjoying directly or indirectly other assets acquired with the proceeds of the donated property.

Fiscal drag particularly by reference to house price inflation is what has caused IHT to become, more recently, of concern to those with estates that should never be within the scope of this tax.

My approach to iHT mitigation is to avoid these complicated trusts and schemes precisely because of things like this. I suspect a lot of these schemes are never detected anyway but, if they are, then it was all for nothing.

I employ gifts and qualifying AIM shares for a portion of my assets, but neither is suitable for most of my worth. For that I am going to rely on a combination of the spousal exemption (my wife is 13 years younger than me and so can reasonably be expected to outlive me for at least that long), a plan to emigrate when my wife retires in a few years, and conspicuous consumption!

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

#448789

Postby scrumpyjack » October 8th, 2021, 5:30 pm

A couple of points about ISAs. Where there isn't a spouse the executor can still leave the ISA alone and the tax benefits continue for up to 3 years. This may be an argument in some cases for a tardy executorship.

If you emigrate, the ISA tax benefits generally no longer apply as other countries do not recognise them as a tax shelter, so gains and income will generally be taxed in your new country of residence. If this applies it is worth realising all gains within the ISA before you leave.

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

#448806

Postby Lootman » October 8th, 2021, 7:12 pm

scrumpyjack wrote:If you emigrate, the ISA tax benefits generally no longer apply as other countries do not recognise them as a tax shelter, so gains and income will generally be taxed in your new country of residence. If this applies it is worth realising all gains within the ISA before you leave

In a recent post, cannot recall where, there was a discussion of how difficult it would be to report ISA income and gains to a foreign tax authority, due to the fact that ISAs produce no tax reporting, and because individual record-keeping is likely to have not had tax issues in mind.

I would be tempted to close out an ISA if I was emigrating permanently. Rather than leave it in the UK and it be a hostage to fortune for a future UK government and/or possible UK IHT concerns.

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

#452748

Postby DiamondEcho » October 24th, 2021, 7:08 pm

dealtn wrote:
88V8 wrote:What I would never adopt in retirement is a strategy that requires me periodically to liquidate assets to generate cash.V8

So you are content to leave the entirety of "the pot" to those you leave behind when you retirement, er, finishes?
(Genuine question in case you think I am being "smart")


I think the above boils down to how much of your hard earned money do you intend to leave to others? Ie isn't the presumption that you intend to finesse selling down your portfolio as you age post-retirement such that ideally you enjoy the lot, and leave little or nothing to others?
Apart from 'securing my wife' which er sounds rather burlesque, my 'heritable' (ie younger/lower earning) relatives are all far smarter than me, and apparently with glowing futures ahead. My peer age relatives are all professionals and/or higher earning than me.

Thus, as I've built my HYP, whilst also taking div income and reinvesting a good part of it, there will come a pivot. Then background/emplyment non-HYP income ebbs way, I live off more or less the HYP income for X years. BUT later the rather less pleasant to conceive final 20 [?] years I'm not going to kid myself the whole portfolio will get progressively sold down to supplement annual household expenditure. I'd expect our typical expenditure to tail off fast as we age anyway - I just observe my aged parents lifestyles re: no more upward house-moves, $$-holidays, $$-cars etc.

So yes back you your original point V8. There's a point - when, per annuity tables? - you might continue to take established portfolio income, but you sell [no idea] 5% of your portfolio p/a in addition? Ideally in the most CGT effective way?

/TLDR I didn't hair-shirt myself much of my adult life, albeit entirely by personal nature, to snuff it and make others who don't need it rich.

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

#452893

Postby Hariseldon58 » October 25th, 2021, 12:08 pm

Interesting that my dividend income is below its level of 2007, yet the capital value is more than 3x the size.

I certainly envisioned living off dividends in 2007 but not so now, I try and have investments as ‘accumulation’ and reinvest dividends and sell if required to top up cash reserves and spend.

14 years into FIRE and ok so far.

It’s certainly comfortable to live off dividends to preserve capital, but it requires a lot of capital or steering investments into high yielding investments that may not perform as well on a total return basis, where you fish in a larger pool.

Not knowing what will happen, a degree of prudence is necessary and it’s probable that most investors will leave a lot of money on the table.

It’s the balance between prudence and the hair shirt !

GeoffF100
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Re: The days of leaving your investments untouched and living off dividends are over

#452908

Postby GeoffF100 » October 25th, 2021, 12:46 pm

Hariseldon58 wrote:It’s certainly comfortable to live off dividends to preserve capital, but it requires a lot of capital or steering investments into high yielding investments that may not perform as well on a total return basis, where you fish in a larger pool.

Going for higher dividends also reduces diversification, which increases risk and reduces risk adjusted return.

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

#452933

Postby Dod101 » October 25th, 2021, 2:01 pm

Hariseldon58 wrote:Interesting that my dividend income is below its level of 2007, yet the capital value is more than 3x the size.

I certainly envisioned living off dividends in 2007 but not so now, I try and have investments as ‘accumulation’ and reinvest dividends and sell if required to top up cash reserves and spend.

14 years into FIRE and ok so far.

It’s certainly comfortable to live off dividends to preserve capital, but it requires a lot of capital or steering investments into high yielding investments that may not perform as well on a total return basis, where you fish in a larger pool.

Not knowing what will happen, a degree of prudence is necessary and it’s probable that most investors will leave a lot of money on the table.

It’s the balance between prudence and the hair shirt !


I live entirely off my dividends. I even save my State Pension. I live alone nowadays and get about a 4% yield from my total share portfolio (which I may say includes a sizeable holding in Scottish Mortgage with virtually no dividend) Most of that 4% is of course tax free since about 80% of the portfolio is held in two ISAs. Whether I have a lot of capital or not would be a matter of opinion but I do not see it that way. I am certainly not a HYPer although of course I have a few high yield shares but I try to get a good spread and am much keener to have a modestly lower yield accompanied by some capital growth.

Hariseldon is obviously more into capital growth than me and if that works for him, then all is well, but I do not accept the message in the heading of this thread.

Dod

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

#453167

Postby TahiPanasDua » October 26th, 2021, 11:38 am

There is a downside to extreme long term holding for idiots like me.

A few of my holdings, fortunately not many, I have had for several decades. They date from a time I knew nothing about taxation or the need for records. I am reluctant to sell them now as I have no idea when I bought them or what I paid. Some were bought in separate lots and transferred between brokers so I can't ask them for records. Complicated or what?

Does anyone know how HMRC would deal with CGT if sold now? If I left them in a will, inheritance tax would presumably be an uncomplicated 40%.

An additional question: can my kids hold the shares and only pay IHT on a later sale or is the tax, after allowances, automatically applied after death?

Maybe this should be on another board?

Thanks for any advice.

TP2.

Dod101
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Re: The days of leaving your investments untouched and living off dividends are over

#453174

Postby Dod101 » October 26th, 2021, 11:55 am

TahiPanasDua wrote:There is a downside to extreme long term holding for idiots like me.

A few of my holdings, fortunately not many, I have had for several decades. They date from a time I knew nothing about taxation or the need for records. I am reluctant to sell them now as I have no idea when I bought them or what I paid. Some were bought in separate lots and transferred between brokers so I can't ask them for records. Complicated or what?

Does anyone know how HMRC would deal with CGT if sold now? If I left them in a will, inheritance tax would presumably be an uncomplicated 40%.

An additional question: can my kids hold the shares and only pay IHT on a later sale or is the tax, after allowances, automatically applied after death?

Maybe this should be on another board?

Thanks for any advice.

TP2.


I too have some shares I have held for upwards of 30 years. I have all the paperwork though. Your answer for selling may be to sell just sufficient in each tax year to keep yourself below the tax threshold so that you do not have to report it in your tax return.. I have no idea how HMRC would deal with it if you cannot provide an acquisition date and thus establish a buying price.

If they remain in your estate then it does not matter when you bought them for IHT and what is more your beneficiaries can then use the value at your date of death as their acquisition cost.

Dod

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

#453210

Postby Lootman » October 26th, 2021, 1:15 pm

Dod101 wrote: I have no idea how HMRC would deal with it if you cannot provide an acquisition date and thus establish a buying price.

The acquisition date is not needed on a tax return. The return asks for it but if you leave it blank that is accepted. Reporting the acquisition date is a throwback to when we had indexation for capital gains, and we no longer do. I have been leaving the date blank for many years now. Same for the number of shares - again asked for but not required, i just put zero, which looks odd but is accepted.

Cost basis is another matter of course, you definitely need that. Presumably you meant that you could look up the purchase price if you knew the date you bought it. Although that is harder if you bought multiple lots on different dates, and if there were subsequent corporate actions that affected the price.

I have a number for the cost basis for all of my taxable holdings but, for some of the older ones, I probably could nor prove it if I were asked to. I could demonstrate that it was reasonable however.

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

#453216

Postby Alaric » October 26th, 2021, 1:29 pm

TahiPanasDua wrote:T
Does anyone know how HMRC would deal with CGT if sold now?


If you sold such that the proceeds didn't exceed the annual CGT allowance, there wouldn't be anything to report even if the base cost was zero.

I agree that long term record keeping can be a headache. The worst are the privatisations since apart from copies of acceptance letters or retained parts of application forms, you don't have a document such as a contract note giving the original purchase price. The data can sometimes be pieced together from resources such as wiki. If relevant the price at 31st March 1982 can be used as base cost. That may help with BP shares.

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

#453407

Postby hiriskpaul » October 26th, 2021, 10:32 pm

Alaric wrote:
TahiPanasDua wrote:T
Does anyone know how HMRC would deal with CGT if sold now?


If you sold such that the proceeds didn't exceed the annual CGT allowance, there wouldn't be anything to report even if the base cost was zero.

I agree that long term record keeping can be a headache. The worst are the privatisations since apart from copies of acceptance letters or retained parts of application forms, you don't have a document such as a contract note giving the original purchase price. The data can sometimes be pieced together from resources such as wiki. If relevant the price at 31st March 1982 can be used as base cost. That may help with BP shares.

I have this problem with an investment trust (Templeton Emerging Markets) I bought in the late 1980s or early 90s with a small inheritance. Ticket vanished somewhere long ago. However I have held the thing so long that the capital gain is now well over 90%, so at some point I plan to sell off tranches each year at just under the CGT allowance.

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

#453460

Postby TahiPanasDua » October 27th, 2021, 7:42 am

Alaric wrote:
TahiPanasDua wrote:T
Does anyone know how HMRC would deal with CGT if sold now?


If you sold such that the proceeds didn't exceed the annual CGT allowance, there wouldn't be anything to report even if the base cost was zero.



Thanks Alaric,
the problem I see is that I wouldn't know how much to sell to keep just under the tax allowance as I don't have any idea of the size of the profit. Maybe you mean just sell a modest amount more than the allowance. That would be possible.

TP2.

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

#453517

Postby Alaric » October 27th, 2021, 11:51 am

TahiPanasDua wrote: Maybe you mean just sell a modest amount more than the allowance. That would be possible.


Which is what I meant. For complete certainty assume the purchase cost was zero. But you may be able to recall what size of minimum investment you went for. If you still have any really old bank statements or cheque stubs, they may help.

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

#453520

Postby wanderer » October 27th, 2021, 11:57 am

I think the idea is just to assume the purchase price was zero and therefore the while value of the shares represents a gain. You can then sell up to £12,300 worth of the shares per year (assuming no other capital gains) and have no CGT concerns.

At least, that's the way it looks before the chancellor steps up to the despatch box at 12.30!!!

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

#477400

Postby 1nvest » January 31st, 2022, 6:11 am

TahiPanasDua wrote:An additional question: can my kids hold the shares and only pay IHT on a later sale or is the tax, after allowances, automatically applied after death?

At the time of death the holdings will be valued at their present day value (number of shares x share price at that time) as part of total estate value. How much IHT is paid or not is subject to your total estate value at that time. If the holdings are continued to be held by the kids then when they come to sell their cost base will be the share value at the time of your death.

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

#477712

Postby TahiPanasDua » February 1st, 2022, 9:49 am

Having just read the whole of this interesting thread again, it is obvious to me that their is no right or wrong approach as people's needs, resources, etc., vary so much.

Personally I am adopting a hybrid approach of natural income plus limited selling within the CGT allowance. Being 77, I feel I have little option but to be predominantly natural yield based. We live almost entirely on dividends. My wife could not cope with the anything other than having a regular no-effort income landing in her bank account in the event I get a sudden one-way express ticket to Hades. Meantime. while waiting at the platform, I can't trust myself to make reasonable selling decisions for too much longer.

Everybody is different. We don't feel the urge to spend the lot on ourselves lest it falls into the hands of our offspring or the (for want of a better word) government. While not rolling in the stuff, we have a bit more than enough to lead the kind of life we want. We are so lucky!

TP2.

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

#477761

Postby stevensfo » February 1st, 2022, 11:58 am

Lootman wrote:
scrumpyjack wrote:If you emigrate, the ISA tax benefits generally no longer apply as other countries do not recognise them as a tax shelter, so gains and income will generally be taxed in your new country of residence. If this applies it is worth realising all gains within the ISA before you leave

In a recent post, cannot recall where, there was a discussion of how difficult it would be to report ISA income and gains to a foreign tax authority, due to the fact that ISAs produce no tax reporting, and because individual record-keeping is likely to have not had tax issues in mind.

I would be tempted to close out an ISA if I was emigrating permanently. Rather than leave it in the UK and it be a hostage to fortune for a future UK government and/or possible UK IHT concerns.


I know it's a bit late, but, re. the ISA I forgot a chat I had with a nice guy who is semi-retired in Malta. He worked for a large airline, has dual British -Maltese nationality (his mum is Maltese/Italian and turned 90 this year!). He lived in London for about twelve years.

He has a part-time job on which he is taxed and also declares his work pension which is remitted to his Maltese bank. In about four years he will receive a small UK state pension which he will also declare. I asked about SIPPs, ISA etc and he has an old ssISA that produces a few hundred a month in dividends but so far left untouched. Not sure how, but it's some kind of investment plan designed by the broker that reinvests everything. He admitted that he doesn't declare this for a number of reasons. Too complicated, too much work and he can't be ar*ed. 8-)

The Maltese authorities are under pressure to tidy up their image as being friendly to money launderers, and when I suggested that he could get into trouble, he shrugged and said that not only did he not intend to send any ISA money to Malta in the future, but he reckoned that since it's not taxable and doesn't have to be declared in the UK, it's almost impossible for anyone to find out about it.

I don't know how true this is. I think he's taking rather a chance, and to be honest, I don't think he'd pay that much tax anyway. Personally I would hate to live with the chance of one day being found out and fined a fortune.

Steve

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

#477944

Postby 1nvest » February 2nd, 2022, 8:03 am

hiriskpaul wrote: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 exorbitant. Risky though if interest rates shoot up.

OR ... put property into multiple names, Joint Tenants (hopefully 7+ years prior to passing). £1M home, £1M stock index, £1M physical gold, spend the imputed rent (ownership is like being both landlord and tenant), and and stock dividends, along with drawing a 1.33% SWR. Which is like gold paying a 4% dividend, alongside historic 4% stock dividends and 4% imputed rent benefits. Rebalancing or not broadly doesn't make much difference to mid/longer term rewards. Split four ways, parents + two kids, and upon one passing the IHT liability might be zero, with perhaps grandchildren being added to the property title as grandparents pass. A factor there however is that upon sale then there may be CGT liabilities unless the property is also the main home/residence.

Liability matched (imputed) rent is better than non liability matched. Doesn't matter if rents collapse or soar, you're covered. Diversification across land, stocks, commodity ... fiat and non-fiat currencies ... income diversified across imputed/dividends/SWR.


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