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Lifetime Allowance - idea
DCB
Posted: 23 May 2018 17:20:04(UTC)
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I may well be in the fortunate position of challenging the SIPP LTA limit of £1.03m in a few years time.
The prospect of a 55% tax charge at the age 75 test or before does not appeal and I wonder if it might be possible to reduce growth in the SIPP by investing in safest ZDP shares. These would be timed pay to no income before age 75 therefore control capital growth in the SIPP.
They could be sold , taking the capital growth , post age 75 when all the tests are done with and LTA no longer bites?
Sounds too easy to be true so probably is!
I am sure some of the people on this forum smarter than me will know the anwers
DB
ian collier
Posted: 23 May 2018 18:37:41(UTC)
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why ! you only pay more tax over the limit ,better to 55% on 200,000 than no tax on nothing,just guessing how much more you might make
Tim D
Posted: 23 May 2018 19:05:42(UTC)
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I can't see how that's supposed to work (unless I'm misunderstanding what you're trying to do)... can you illustrate with some specific example of what you'd buy and what you think would happen to its value? ZDPs don't pay income... all the gains are rolled up and returned as capital at redemption time (but the capital value certainly still grows in the interim). Unless there's some peculiarity of how their value grows in practice, it's hard to see how they'd help keep portfolio value down before a particular date and then have it pop up later (if that's actually your goal). Unless you just mean you want to slow the growth of the portfolio... in which case just moving some of it to cash, gilts etc would be the easiest way. There are AFAIK no ways of magically hiding capital growth, at least with the sort of liquid assets you're allowed to hold in a SIPP (the tax man would be on them like a hawk if there was). Although it wouldn't surprise me if all sorts of dodgy dealings went on with property in SIPPs... buildings where those terrible subsidence/damp/access problems suddenly clear up after the LTA check for example... maybe why direct property holding in SIPPs is made so tricky.
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Law Man on 24/05/2018(UTC)
DCB
Posted: 23 May 2018 19:16:52(UTC)
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Tim
I am assuming that the value of a ZDP Capital share does not emerge/ become payable until maturity of the Investment Trust because until then it is at risk.. .the Trust may go bust and never pay
D
Tim D
Posted: 23 May 2018 19:21:51(UTC)
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That sounds plausible (that's the sort of thing I was getting at with "some peculiarity of how their value grows in practice")... but any idea how big a discount is actually available in practice? Especially given you say you're interested in the "safest ZDP shares".
Steve KT
Posted: 23 May 2018 19:52:24(UTC)
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How would the ZDP's be valued when you are 75 and they assess you or LTA ? If they are approaching maturity wouldn't they be fair valued and therefore you'd pay the LTA.

It
J Thomas
Posted: 23 May 2018 21:43:52(UTC)
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This lifetime allowance limit of £1.03 Million is beginning to affect more people with asset price inflation, especially those holding global shares priced in Sterling.
I am aged 54, and my own private SIPP is now approaching £900,000, invested in Standard Life My Folio III, Fundsmith Equity, and Lindsell Train Global Equity.
Indeed, there is a strong possibility my LTA will be breached before I am able to draw my pension at age 55-56.
However as the time approaches when I can actually draw the pension, I am very aware that cashing it in will mean the loss of the very valuable Inheritance tax benefits. Pensions held in a SIPP before age 75 are not liable for the 40% IHT charge.
It may be worthwhile leaving the SIPP to grow, suffering the 55% tax charge on the excess LTA amount over £1.03 Million, instead of the 40% IHT tax charge on the *entire* pension fund.
In the future the LTA may be abolished of course....

DCB
Posted: 24 May 2018 07:32:20(UTC)
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Thank you for the replies
Split Capital shares need treating with care but I believe after the last disaster they have cleaned up and stopped investing in each other to pump up prices.
To use a real life example in the health care sector:
Price today 105p
Redemption date 19th June 2024
Redemption price 122.2.p
Income in the meantime Zero

Seems to me it depends on how the capital shares values are quoted in the period between now and 2024...............they are becoming potentially more valuable every day but that value cannot be released until 2024
Tim D
Posted: 24 May 2018 09:07:40(UTC)
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The value certainly can be released because you can sell them on the open market, just like you can buy them. Good luck telling the taxman your ZDPs should only be worth 105p for your LTA calculation when they can be seen to be trading for 115p.

My general expectation would be that in the absence of any new information to affect the redemption prospects, the price would appreciate smoothly by ~2.5% per year (which is the rate which will raise 105p to 122.2p over 6 years). That's what I'd expect for a bond anyway... I'd be interested to see any evidence that ZDPs (especially "safe" ones) behave significantly differently in practice.
Catch The Pigeon
Posted: 24 May 2018 10:01:30(UTC)
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Why would you want to reduce your growth???

It's better to pay 55% tax on £200,000. (Net £90,000), than 55% tax on £0.

Mad idea.
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Tim D on 24/05/2018(UTC), Guest on 24/05/2018(UTC)
DCB
Posted: 24 May 2018 10:40:01(UTC)
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Yep....Looks like it is back to the drawing board!
Catch The Pigeon
Posted: 24 May 2018 10:53:48(UTC)
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DCB;62852 wrote:
Yep....Looks like it is back to the drawing board!


Just accept there may be some tax to pay. Not a lot you can do about it.
philip gosling
Posted: 24 May 2018 11:01:21(UTC)
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DCB;62852 wrote:
Yep....Looks like it is back to the drawing board!



Why not stop putting money into your SIPP and invest it in EIS /VCTs and /or other AIM listed shares. That will reduce tax paid to at most 40% and for some investments to 0% including Inheritance Tax.
Catch The Pigeon
Posted: 24 May 2018 12:46:05(UTC)
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philip gosling;62855 wrote:
DCB;62852 wrote:
Yep....Looks like it is back to the drawing board!



Why not stop putting money into your SIPP and invest it in EIS /VCTs and /or other AIM listed shares. That will reduce tax paid to at most 40% and for some investments to 0% including Inheritance Tax.


EIS investments qualify for Business Property Relief (BPR), therefore exempt from IHT after 2 years of holding.

VCT investment's do not qualify for BPR.
Julianw
Posted: 24 May 2018 13:05:22(UTC)
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Keep it simple. Hit the ball down the centre of the court and stay away from the lines!

If I was near age of 75, near life time allowance, and money is to be left to my heirs.

I would just crystallise my pension.

Assume you got 1.03 million
-take 25% tax free lump sum £257000
-put 75% into drawdown £771000

Draw down enough each year to keep the drawdown amount below £771000 to avoid any further tax liability at age 75 lifetime retest.

Drawdown pot is still outside inheritance tax. If you do not need the tax free lump sum, give it away if you want to avoid inheritance tax. You still have control of the drawdown pot which you can take an income if you need more money.

Of course you should stop making further contributions with a few exceptions:
-you have income between 100000 and 124000, effective tax rate 60%
-you get substantial employer contribution/match
-you lose associated benefits like life insurance
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Guest on 24/05/2018(UTC), DCB on 28/05/2018(UTC)
Krowten
Posted: 24 May 2018 17:15:40(UTC)
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The penalty is 55% when the excess is taken out as capital. It is 25% when taken out as income spread over 20 years.

If the value was £1,100,000+ at retirement then a tax would have to be paid on the excess depending on the LTA of time of vesting - for illustration with simple values:

£55,000 if an excess £100,000 is realised as capital

or

£25,000/20 = £1250 per year as (additional) income tax for the next 20 years or till death if before

There is an additional LTA test at 75, so it has to be maintained at the LTA value of the day to avoid additional charges

Hope that helps
Law Man
Posted: 24 May 2018 21:28:04(UTC)
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As I shall never reach the LTA limit, I do not know; but Julian indicates the simple approach: draw down to keep under the LTA, and give away the money. Make regular gifts out of income, and you avoid retrospective IHT.
Steve KT
Posted: 27 May 2018 14:31:10(UTC)
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as others have said- the correct answer once you have exceeded the LTA, and once you are 55 - seems to me to be that you crystalise into drawdown.
Monty Claret
Posted: 27 May 2018 16:51:55(UTC)
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I would not crystallise all at once at 55.

If needed at 55, place a small amount into drawdown, or use a Uncrystallised Funds Pension Lump Sum. Remember the tax is only payable when you have used up all your LTA, or protected LTA.

I would then wait until a market correction, and depending how bad it was place the remaining amount into drawdown. My plan is to put my riskiest investments in first, as they will not doubt have fallen the furthest. That way your drawdown pot could over a short time recover to far in excess of your LTA.

Do not forget to drawdown enough, so that at 75 you will not pay a second LTA charge!

Happy spending.
Steve KT
Posted: 27 May 2018 17:34:34(UTC)
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If you are convinced that your investment will fall, then you should sell them now
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