The Lemon Fool

Is it better to allocate a higher percentage of growth stocks into your ISA for CGT reasons?
I am just looking at how I allocate shares across my ISA, SIPP and general investment portfolio and enquiring to see what others think on this.

Antony

Antonyfool wrote:Is it better to allocate a higher percentage of growth stocks into your ISA for CGT reasons?
I am just looking at how I allocate shares across my ISA, SIPP and general investment portfolio and enquiring to see what others think on this.

Antony

Short answer - it depends on your personal situation and specifically your other income from employment, pensions and so on.

For me, no. CGT is less than my tax rate on dividends. The other big advantage is that barring a few events like takeovers, you can decide when to incur a CGT liability. Also, if your brokerage offers margin lending you can use that to extract cash without incurring a tax liability.

It would depend on the amounts of income and growth you anticipate from your different investments. You have a CGT allowance of £12,300 per year before the gains attract tax, outside an ISA. You can only get £2,000 of dividends at 0% tax each year before you pay tax on those (and if you're a higher rate taxpayer, that's 32.5%, above the CGT rate). If you're happy regularly selling investments and reinvesting, to make use of that CGT allowance, you might well be better off having investments with higher dividends protected in the ISA. You'll have to work out a scenario, based on what you have already, what you expect to invest (or withdraw) in future, and what growth and income may be.

Provided you have enough in your gi account to use your CGT allowance every year.

That catered for, allocate to tax shelters those stocks that will or may generate the heaviest tax hit, eg bonds paying interest as distinct from stocks paying divis, and those stocks you expect to grow.

Bearing in mind of course that losses in an ISA are doubly painful as they cannot be offset against CGT.

V8

Thank you all for replying.

What got me thinking about this is that in my younger days I never gave any thought about allocation between the three vehicles and ended up with mainly growth stocks in my SIPP and GIA.

I got very lucky with SMT ( SIPP) and recently sold out a large chunk at around 1400 (normally I make the wrong call and the stock then soars after).

I am in my 50s and on track to hit the LTA by the time I retire.

I hope to buy in to SMT again at some stage soonish and was debating if I should buy in using my ISA rather than my SIPP given it should in theory hit the LTA

Clearly needs more thought but once again thanks for the comments

Antony

Antonyfool wrote:Is it better to allocate a higher percentage of growth stocks into your ISA for CGT reasons?
I am just looking at how I allocate shares across my ISA, SIPP and general investment portfolio and enquiring to see what others think on this.

Antony

There is no CGT in an ISA. Do you mean moving unsheltered shares into an ISA?

For me it makes good sense to hold as much as possible in a tax shelter. Why hold shares outside one?

TJH

tjh290633 wrote:

Antonyfool wrote:Is it better to allocate a higher percentage of growth stocks into your ISA for CGT reasons?
I am just looking at how I allocate shares across my ISA, SIPP and general investment portfolio and enquiring to see what others think on this.

There is no CGT in an ISA. Do you mean moving unsheltered shares into an ISA?

For me it makes good sense to hold as much as possible in a tax shelter. Why hold shares outside one?

I would assume that his net worth exceeds what is possible to reasonably shelter in an ISA with its subscription limits.

And at some point you might want to vacate an ISA due to its inflexibility to mitigating the effects of IHT when you expire.

I guess my real question was, should my time poor and clueless investor younger self have allocated the value and growth shares differently and is there any established theory on this?

I ended up with a significant number of growth stocks in my SIPP and GIA and value stocks in my ISA.

With the SIPP there is the LTA to think about and clearly CGT in the GIA. And clearly there is IHT to consider as pointed out.

Antony

Antonyfool wrote:I guess my real question was, should my time poor and clueless investor younger self have allocated the value and growth shares differently and is there any established theory on this?

I ended up with a significant number of growth stocks in my SIPP and GIA and value stocks in my ISA.

With the SIPP there is the LTA to think about and clearly CGT in the GIA. And clearly there is IHT to consider as pointed out.

Antony

We hold a disproportionate amount of US investments outside our ISAs as they are lower yielding than other markets and for some of the investments we get a tax credit for the 15% dividend withholding tax. It has meant lower income tax on the dividends than would otherwise have been the case, but with the benefit of hindsight I think it would have been better to put more of the US investments into the ISAs simply because they have grown much more over the last several years than non-US investments. This is purely hindsight though. Starting now, I would go with the same policy to reduce income tax.

In our SIPPs we are very overweight US shares ETFs. I did that because we could invest in US listed ETFs which enabled payment of dividends without the 15% withholding tax (a pension fund tax break). However, US listed ETFs can no longer be purchased in SIPPs, so again, I would concentrate the higher yielding investments in SIPPs as well.

It seems to me that your ISA should contain anything that you consider likely to increase in value most, whether due to dividends or capital makes no difference.

It depends partly on your personal tax situation - eg how much tax do you pay on dividend income outside an ISA?

Things you might be willing or able to hold until you die (such as divi paying investment trusts or funds) are OK outside your ISA as that CGT will hopefully never be paid.