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Claiming Unearned Income tax back
Geoff James2
Posted: 26 October 2017 12:56:52(UTC)
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Hi

I have encountered one of those nice-to-have problems - it may be that I simply do not understand the rules.

My wife and I are below pension age and us savings before our company pensions kick in. Neither of us have "earned income". Our income tax is based on Sipp drawdown, interest, dividends and capital gains.

My wife draws money from a SIPP only because it is tax efficient - we plan to cash in that SIPP. This years she will drawdown only the £11,500 nil rate band. We would normally draw much more, but the CGT issue (below) seems to indicate that the optimal drawdown is only £11.5K.

We have amassed a significant potential CGT exposure on share dealing. I am winding those shares down but there is no way to avoid paying CGT at 20% over the next few years.

My questions are

1) Can we do anything to claim back any of the tax we pay on pension drawdown? eg can the income tax be offset against VCTs, or be paid into a pension without any pension re-cycling clauses kicking?

2) Can we do anything to minimize our reported taxable "earnings" so that a smaller part of our realised gains from selling shares is exposed to the 20% CGT band?

Many thanks
Geoff

Mr J
Posted: 26 October 2017 21:19:23(UTC)
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Seems an odd one.

I am no tax specialist but both you and your wife have your own income tax allowance of £11500 and your own CGT allowance of £11300. So that is a potential £45600 pa before paying tax by fully utilising those allowances. Then there is also the interest and dividend tax allowances. I would have thought your wife could take 25% tax free from the SIPP too. Do you need to spend more than that each year ? CGT starts at 10% too (excluding property gains).

You each have an annual ISA allowance of £20k. So you should be using that each year to shelter some investments from future CGT. Presumably something you may have been neglecting to do.

Seems unusual to have investments you are managing but not to be on top of the associated tax regime. Taxation fully described in fairly clear terms on the .gov website.

Consider taking financial advice as this may help optimize your tax and especially if you don’t/won’t/can’t understand taxation.

Remember to recognize you might live to 90+ so large sums are needed to give you income for 30 plus years.
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Tim D on 26/10/2017(UTC)
Keith Hilton
Posted: 26 October 2017 21:32:52(UTC)
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Under 75 years of age, everyone is entitled to pay in £3600 gross (or £2880 net) into a pension. Basically, the government gives you £720 income tax rebate, whether or not you actually pay income tax.
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Guest on 27/10/2017(UTC)
Money Spider
Posted: 26 October 2017 22:46:10(UTC)
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I suggest, like a previous poster, that you familiarise yourself with the current UK tax regime.

Both you and your wife are entitled to the following (assuming that you are Basic Rate taxpayers and have <£11,500 of earnings and pensions income):

£11,500 Personal Allowance
£1,000 Savings Allowance (interest)
£5,000 Starting Rate for Savings (interest)
£5,000 Dividend Allowance (reducing to £2,000 for 2018-19)

That gives EACH of you £22,500 of tax-free income. If you then have £20,000 of further dividends you will pay (£20,000 * 7.5%) £1,500 of dividend tax. Given this hypothetical scenario, you would still have (£45,000 - £42,500) £2,500 of your basic rate tax band available. You could apply this to CGT gains.

So, between you and your wife, you could have:
Gross income of £85,000 with net amount after tax of £82,000
Capital Gains of £27,600 with net amount after CG tax of £27,100

I'm afraid that you need to invest the effort to understand the UK tax rules (the rules are not difficult, but neither are they straightforward), or pay someone to do it for you.


Edit:
I just re-read your original post and realise your real issue is CGT. There's not a way (that I know of) to make your earnings 'irrelevant' (to increase your 10% CGT band) other than new pension contributions and VCTs.
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Guest on 27/10/2017(UTC)
Geoff James2
Posted: 27 October 2017 05:52:52(UTC)
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Thanks Money Spider,

Money Spider;52474 wrote:
I suggest, like a previous poster, that you familiarise yourself with the current UK tax regime.

I just re-read your original post and realise your real issue is CGT. There's not a way (that I know of) to make your earnings 'irrelevant' (to increase your 10% CGT band) other than new pension contributions and VCTs.


There is a crux of the problem. My CGT exposure is large and painful - It was my mistake in letter a US listed share double in value so many times over a few years. I was distracted with work. But now we are retired and this issue cropped up in our financial house cleaning.

So I am trying to sell down the shareholding (or reset the book cost) such that I minimise CGT. But the CGT bands are linked to income tax bands. So that means the more I can minimise my other earnings the greater amount share dealing gains will be subject to 10% CGT rather than 20%.

The shares are jointly owned with my wife (dual CGT allowance) and I am planning to materialise the profits over a number of tax years - but it is still going to be a great deal of CGT to pay.

I know I could defer the CGT by using the profits to buy AIM shares etc. But I think it would be better to leave the money in the US shares - it achieves nearly to the same thing, is lower cost and there is much more upside.

I can keep both our taxable incomes below 11500 as we can elect not to draw on our Sipps - but that serve to defer the income tax as we will be drawing company pensions soon and so the pensions will use up the NRB and a chunk of the std rate band.

It may be that the only option is the slow release of profit so that the CGT allowance is used each year.

Thank you for your thoughts.
Geoff
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Tim D on 27/10/2017(UTC)
Keith Hilton
Posted: 27 October 2017 09:24:59(UTC)
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Do you have any losses, either current or historic, that you can offset against the gains?
jeffian
Posted: 27 October 2017 10:12:08(UTC)
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Having lived through the era of Dennis Healey, and with the (hopefully remote) prospect of Jeremy Corbyn, I felt a slight shiver at the use of the phrase "unearned income"!
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Mickey on 27/10/2017(UTC), Captain Slugwash on 29/10/2017(UTC)
Mickey
Posted: 27 October 2017 10:22:01(UTC)
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jeffian;52480 wrote:
Having lived through the era of Dennis Healey, and with the (hopefully remote) prospect of Jeremy Corbyn, I felt a slight shiver at the use of the phrase "unearned income"!

The idea seems a logical step for Corbyn, likely to be a vote winner if people only think of today rather than how it will affect future pensions, inheritance and savings etc. If it happens I may have a use for the two empty plastic storage containers sitting unused under the bed.
Tim D
Posted: 27 October 2017 10:26:16(UTC)
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Geoff James2;52477 wrote:
So I am trying to sell down the shareholding (or reset the book cost) such that I minimise CGT.


Don't know what your situation is with inheritance planning but I remember an interesting conversation with a CFP where he pointed out that the potentially valuable book-cost resetting properties of death are often overlooked. Sometimes there's an argument for just hanging onto and passing on assets on large gains; of course it basically means your heirs are taking on your single-asset concentration risks.

Post pension-reforms there may also be IHT-related reasons for wanting to leave the SIPP intact; see "The Opportunity" section of http://www.telegraph.co....-dodge-inheritance-tax/ )
Money Spider
Posted: 27 October 2017 10:34:25(UTC)
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Geoff,
You're probably already aware that you can transfer assets to your wife with no CGT to pay (she will 'inherit' the CGs from you in the transfer). So it would pay to have your 'high gain assets' divided equally between you, depending on any differential between your current incomes. It might help you maximise your use of allowances/lower CGT bands.
However, I think that you're pretty clued up on the basics.

Not that's in any consolation, but I appreciate your problem. I have some 'high gain assets' that appreciated during years at work when my mind was focused there(work) rather than my investments.. One challenge is having some 'old' ACC class OEICs in this position:
1. I'm taxed on the income, but its rolled into the unit price and not available as cash.
2. Crystallising the gain will exceed my CGT allowance.
3. I have to figure out the changing cost base as dividends accrue.
4. I would prefer to invest the proceeds in other ITs (where I now focus)
Investing is a journey where each of us learns along the way (hint: If you want to buy OEICs, buy the INC and not the ACC issue).

I have a plan (multi-year!), so I'm not asking for advice on this, but being aware of it might help other readers.
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Guest on 27/10/2017(UTC)
Mr J
Posted: 27 October 2017 12:48:25(UTC)
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Geoff,

If your investment gains are so very large then why not just recognize your good fortune and actually pay the CGT. 20% is not such a punitive rate compared with top rates of income tax or IHT.

Geoff James2
Posted: 29 October 2017 08:41:53(UTC)
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Mr J;52491 wrote:
Geoff,
If your investment gains are so very large then why not just recognize your good fortune and actually pay the CGT. 20% is not such a punitive rate compared with top rates of income tax or IHT.


Hi, Yes I totally agree that that is a viable option.

I wonder about other options and ones that optimise better.

Regards
Geoff
Harry Trout
Posted: 29 October 2017 09:32:40(UTC)
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Quote:
(hint: If you want to buy OEICs, buy the INC and not the ACC issue).


Money Spider

You are probably aware of this but just in case here is some advice I received from Hargreaves Lansdown in the scenario of converting ACC units into INC units:

If you sell a fund and buy back a different class or unit type of that fund within 30 days of the sale, it is not seen as a realisation for capital gains purposes. Therefore, if you were to sell accumulation units of a fund and immediately buy back income units in the same fund, you would not be realising a capital gain/loss for that stock.

I understand that this would not help much from an overall tax perspective in that all it is doing is deferring CGT but at least you would then get some cash from the income units to invest in ITs?
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Mickey on 29/10/2017(UTC)
Stephen B.
Posted: 29 October 2017 11:24:58(UTC)
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You don't make it entirely clear to what extent you actually need the money, vs just reallocating it in an efficent way. It may also depend on the company - is it a high-risk tech company where the gains might evaporate if you wait, or something you'd be happy to stay in infinitely? As someone said, if it's held until death gains are extinguished (or replaced by inheritance tax).

As a slightly left-field suggestion you could consider making some high-risk investments like warrants where you might lose the lot. If you do you could offset the loss against gains, and if they do well you've made money even if you do have to pay CGT ...
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