Used my CGT allowance

[88V8]

Hoary old chestnut for long-time HYPers, but......

This morning I sold all my Rio and immediately bought BHP.
And I sold all my Shell and immediately bought BP.

HYPers don't like to sell, but where there is a credible equivalent In a sector, I view this as selling without selling.
Of course, they're not an exact equivalent, the yields differ for a start. But I aim to buy back after the 30 days idle period, so the purpose of this switch is to keep me in the sector price movement.
BAT and IMB might be other examples.

Not bomb-proof. Stuff can happen. Thirty days can be a long time. One takes a chance.
One also has to watch the xd dates, be silly to miss a divi.

OH is about to reverse the process. Normally, she holds BP while I hold Shell, now she's going to switch.
Another consideration, there is a cost, fees etc. On these sizeable holdings the fee is relatively modest.
There's also the matter of spread, on these heavily traded stocks that's very tight.
And I do like to use up my (higher rate) CGT allowance.

A practical method.

An aside-thought... if Corby gets in, the CGT rate will rise, betcha. So one is potentially saving more than the 20% current rate.
Just a thought.

V8

[JohnB]

Puzzled why you want to switch back if you are paired with your OH, but then I sold an Europe tracker and bought another one for CGT defusing this year.

[tjh290633]

With the new tax year approaching, Bed and ISA might be a better move.

TJH

[idpickering]

I’m puzzled as to why anyone would bother with such swapping and changing. HYP is long term hold. I have both oilies on board, equally weighted near as damn it, and there they’ll stay. But each to their own.

Ian.

[PinkDalek]

I’m puzzled as to why anyone would bother with such swapping and changing.

Explained in the OP where he also states he aims to buy back after the 30 days idle period. It would appear to be valid tax planning, where the tax shelters are unavailable, and might even be something a Dorisian adviser would have advised, back in the day, had she had one.

[Itsallaguess]

I’m puzzled as to why anyone would bother with such swapping and changing. HYP is long term hold.

I have both oilies on board, equally weighted near as damn it, and there they’ll stay. But each to their own.

The OP gave enough of an explanation to remove the need for any puzzlement whatsoever -

On these sizeable holdings the fee is relatively modest.

There's also the matter of spread, on these heavily traded stocks that's very tight.

And I do like to use up my (higher rate) CGT allowance.

https://www.lemonfool.co.uk/viewtopic.php?f=15&t=17106#p212890

Having a 'long term hold' approach to a HYP portfolio is not at all incompatible with still using CGT allowances where it's beneficial, or where it might well turn out to be beneficial, to do so....

We should never forget that capital-gains 'events' are often completely outside of our personal control, and are sometimes thrust upon us by independent company decisions..

The CGT allowance is available each year to help mitigate the cost of inaction....

Cheers,

Itsallaguess

[Dod101]

Sounds like good sense to me. I have a prime example where long term tax planning would have been a good idea. Imperial Brands which on Monday I will sell and put into my ISA. I do not understand why I should have to pay CGT on such a transaction since it is easily seen that I am retaining beneficial ownership but I suppose that is by the by.

I currently hold a certificate which is dated 18 April 1997, although I bought on 27 March 1997. I have done nothing with this holding since then, although I participated in the rights issue of 2002, sold the rights arising from the next rights issue in 2008, and in June 2015 sold the extra shares that I had received from the 2002 rights issue. The shares I now hold, almost exactly the £20,000 ISA subscription, I have effectively received for nothing, plus a bonus of around £7,500. I will of course have to pay some CGT. Had I done what the OP has, I could easily have avoided that. Incidentally, excluding the substantial dividends which I have received over the past 22 years (well over £15,000), the XIRR even at today's depressed share price works out at about 11.6%.

Share prices were, buy at £4.19 in 1997, bought at the 2002 rights issue at £4.80, sold these at £33.725 in 2015 and now they are around £25.50.

That is not me being clever; it is simply the result of LTBH provided you buy a decent share of course.

Dod

[Bouleversee]

I’m puzzled as to why anyone would bother with such swapping and changing.

Explained in the OP where he also states he aims to buy back after the 30 days idle period. It would appear to be valid tax planning, where the tax shelters are unavailable, and might even be something a Dorisian adviser would have advised, back in the day, had she had one.

This Doris (who has never had an adviser) has always used her CGT allowance, often by swapping around in the family and in the case of gifting to sprogs, as opposed to selling, no costs involved. Even with sales within the family, there is only stamp duty to pay. Of course, if your shares are all in ISAs there is no need but mine aren't and in that case unless one does this exercise there could be a large sum of tax to pay when a large cash sum is needed. Where holdings are not certificated, I bed and isa or just sell to realise a profit or loss and buy something else in the ISA. As there is no cgt on death, there comes a point when it may be no longer necessary but it is certainly worthwhile when one is younger and it does enable one to avoid or reduce tax on disposals in later years when it does, admittedly become more difficult to remember the ins and outs of it all and tends to get simplified.

[Itsallaguess]

I will of course have to pay some CGT. Had I done what the OP has, I could easily have avoided that.

Great example Dod, showing how these capital gains can creep up on us over many years if we choose to studiously follow the LTBH approach without taking CGT into consideration - and that's taking an example into account where you've still got control over the process, which often we do not, and sometimes these 'CGT events' are thrust upon us as private investors, and we sometimes find ourselves with tax bills that we've not actively generated via our own actions, but simply via our own inaction....

I've tried to move my higher-yielding HYP components into my ISA accounts over the years, to both take advantage of the yearly ISA allowance and also to help manage some capital-gains at the same time. Over a few years this approach has allowed me to iron out some of the larger capital-gains lumps in my non-sheltered account, as well as helping to manage my exposure to the recent dividend-allowance too. Win-win for what is in reality a very low cost in both financial and time-management terms..

Given that both the CGT allowance and the ISA allowance are yearly allowances, I see this as an important part of my HYP management processes, and can think of no good reason why this aspect of portfolio-management should be sacrificed at the LTBH alter....

Cheers,

Itsallaguess

[TedSwippet]

One also has to watch the xd dates, be silly to miss a divi.

Would it, though? In general, on its ex-dividend date a stock's price will drop by an amount equivalent to the dividend to be paid.

In this case, by missing a dividend you would then buy back at a lower price than if there had been no dividend. Skipping a dividend like this effectively converts some higher-taxed dividend income into lower-taxed capital gains.

[spiderbill]

Yes, seems very sensible, particularly where you have a high level of unsheltered shares. And a useful reminder to always keep thinking.

Fortunately only 28% of my individual shares are unsheltered and unfortunately of those the majority are showing losses rather than gains (mostly bought with surplus cash in late 2017 and suffering from the downturn last year) so right now I'm not too affected (although I did just sell the unsheltered half of my RPC holding at a decent profit since it's going to be sold for me later this year anyway).

However such planning may well come more into the picture in the next few years as my ISA allowances for the next 4 years will be used up on sheltering an OEIC I bought last year, so there'll be nothing left for my shares and any ISA purchases will have to come from sheltered dividends.

Assuming we get the hoped for growth/recovery of some of the HYP stalwarts (Aviva, IMB, Glaxo, HSBC, L&G, RDSB, Petrofac) that I have portions of which are unsheltered, then this approach could be essential to avoid unnecessary tax. While in the long run we're all LTBH and most of those look fairly stable you never know what might happen in the way of a company split or unexpected return of capital so consolidate the gains free of tax while you can. An overall strategy shouldn't preclude occasional tactical manoeuvres where they have obvious benefits.

cheers
Spiderbill

[88V8]

With the new tax year approaching, Bed and ISA might be a better move.

Yes, in many cases that would be sensible, but we will fill our ISAs with new cash tomorrow.

Why not just swap with OH...... well her holdings are less than mine. And it's simpler to manage our portfolios separately.

Miss a divi, yes in theory the price drops by an equivalent. In theory. The divi is definite, unless is buying Prefs or suchlike Fixed Interest, the drop isn't. Stuff happens.

About three quarters of our shares are unsheltered; I didn't useter do this, this CGT eating, in 2011 when we moved house at short notice and for six months had two houses and thus had to liberate a fair amount of capital, I got stuck with an annoying amount of CGT. As Allaguess says, one never knows what life will bring.
I also sold most of my then ISA, which seemed sensible at the time, save tax, but that was six figures of sheltered holding that was thereafter exposed.
The Tax Man's gonna get you one way or the other, best to use what little manoueverability we have.

V8

[JohnB]

One lesson from that, always ensure you have access to a flexible ISA. I'm only putting in 19k tomorrow, so I leave the option open to have a flexible cash ISA I could liquidate all my equity ISAs into in case I need to buy a house for cash next year, which is possible.

[johnstevens77]

The last thing we did for this tax year was for my wife to sell enough BATS (ex div) to realise her remaining CGT allowance. She then topped up her ISA leaving the remaining cash in the dealing account. Next week, she will sell the remaining BATS and transfer the proceeds along with the balance of this weeks sale into the ISA and buy the BATS shares back again. Next will to work out which shares to transfer to her for her to sell for her ISA, taking into consideration her remaining CG allowance and which shares to leave in her dealing account for income while staying below the taxable income threshold.

john

[Dod101]

This thread although interesting does not have a lot to do with HYP - Practical and I thought that my contribution mainly on topic (for the thread) might have elicited a response on the other aspect which is that an LTBH approach, given a half decent share to start with, can produce very good results and in particular, Imperial Brands has been a great share for the last 22 years. I do not subscribe to Stephen Bland's LTBH come what may (or even May) but overall it is a good strategy. However when you see a problem such as RBS was in 2008, take action and sell!

Dod

[Gengulphus]

This morning I sold all my Rio and immediately bought BHP.
And I sold all my Shell and immediately bought BP.

HYPers don't like to sell, but where there is a credible equivalent In a sector, I view this as selling without selling.
Of course, they're not an exact equivalent, the yields differ for a start. But I aim to buy back after the 30 days idle period, so the purpose of this switch is to keep me in the sector price movement.
...
OH is about to reverse the process. Normally, she holds BP while I hold Shell, now she's going to switch.

Like JohnB, I don't see the point of both switching back 31 (or more) days later and OH doing the opposite of you, though one might want to do one for part of the exercise and the other for the rest. The aim of the exercise is to realise the capital gains required to use up one's CGT allowance with minimal effect on the holdings. If one has an OH (and the holdings one cares about are the combined holdings), then selling share A and buying share B while OH sells share B and buys share A (each choosing the size of their sale to realise their desired capital gain, and the size of their purchase to be the size of the other's sale) does the job perfectly - any switching back just adds extra trading costs for no further benefit. It's only if one doesn't have an OH (or does have one but for some reason one specifically cares about what's in one's own holdings) that switching back might be useful...

A few other points about that 'you switch from A to B, OH switches from B to A' technique, also known as (a form of) 'bed-and-spousing':

* Like all other forms of selling for CGT savings, it can equally well be done to reduce net gains above the CGT allowance down to or towards it by realising losses, as to increase net gains below the allowance up to or towards it by realising gains. One doesn't have a choice about which of those to do, of course - one is appropriate and the other not, depending on what gains and losses one has already been forced to realise - but it's worth saying that the technique tends to be rather more cost-effective when used to reduce net gains than when used to increase them. And of course, it's also more cost-effective if it kills two birds with one stone - i.e. achieves some other aim(s) in the process, such as raising cash one wouldn't otherwise have available for subscribing to one's ISA and subscribing it between the sale and the purchase, or making a change one desires to make to one's HYP. (More on both of these points towards the end of this post.)

* There's no real need for shares A and B to be from the same sector - they can be any two shares you like, because whatever they are, the combined holdings are unchanged apart from the combined cash being down by the trading costs.

* In its pure form, there is however a need for you and OH to raise roughly equal amounts with the sales, so that each of you has enough cash to buy an equivalent holding of the other's sold share, possibly using some spare dividends or other cash in the account to make a small adjustment. And that's not necessarily going to be easy, both because the two of you might want to realise very different capital gains (e.g. because one has already realised a significant gain during the year through a takeover and the other hasn't), or because the ranges of unrealised capital gains available reasonably cost-effectively from their holdings differ markedly (see the rest of this post for why that might affect the sale amounts). If necessary, however, each can make a sale of the amount that suits them, with the one who wants the larger sale treating it as two sales, one for an amount that matches their spouse's sale, and the other for the rest (but obviously actually done as just one sale to save a commission). Each then makes a buy with the smaller amount as above, leaving the one who wanted the larger sale with the 'remainder' cash, which they deal with by a non-bed-and-spousing technique such as bed-and-ISAing, by achieving some other aim such as rebalancing the portfolio a bit by buying a different share, or if need be (and at the cost of extra risk of the price having moved substantially) by waiting until 31 or more days later to repurchase with it. So in that last case, one does use both the bed-and-spousing technique and waiting for 31 or more days to buy back - but only one of the two on any particular part of the sale proceeds.

* The trading costs typically have a much bigger effect than you might imagine from the apparently small 0.5% rate of stamp duty, because (a) it's 0.5% of the net sale proceeds, taken when you reinvest them; (b) the gain you're realising is less than the proceeds of the sale, especially if the holding you're selling has only risen by a modest percentage; (c) the CGT potentially saved is typically quite a lot less than the gain you're realising; (d) the CGT saving is only in the future and only a potential saving, not a certain one. To explain the last: OH ends up with an equivalent holding to your original holding of share A, except that it's at a higher base cost than yours was, and correspondingly in reverse for share B. So if at some point in the future share A is taken over or you decide that it really should be tinkered away from your joint holdings, the gain on it will be less than it would have been if you hadn't bed-and-spoused - and that's when the CGT saving potentially happens. It might never happen at all for at least three reasons: Firstly, you might continue holding the shares until you die - CGT forgets about all gains that are still unrealised at the point of death, passing the job of taxing all capital (whether base cost or unrealised gains) over to Inheritance Tax. Secondly, the gain might end up being realised, but fall within your CGT allowance that year. Thirdly, CGT might be abolished (I admit that this one seems pretty unlikely!).

To give an example (with numbers chosen for roundness rather than anything else): suppose you're thinking of realising a gain of £5k to fill up your CGT allowance. You look through your portfolio and find a holding that you bought for £25k and whose current value is £30k (so standing on a 20% capital gain). That looks suitable, but let's look at the costs, the main one of which is the 0.5% stamp duty when the £30k is reinvested: that's £150. Broker commission might add £20 to that (one £10 commission for the sale and another for the reinvestment purchase), and while bid/offer spread on a HYP share will be a very small percentage, it's not totally negligible - 0.1% would be a reasonable ballpark figure, which comes to £30 and produces about £200 costs in total (or £202 if one takes the two PTM levies into account, but that's negligible because it's smaller than the uncertainty in the bid/offer spread). The potential future CGT saving depends on what the CGT rate is at the point when the future sale happens, which is very unpredictable, since whether it happens at all, when it happens if it does and what the government in charge of the tax rates will be at the time are all highly unpredictable. But assuming it's 20% as at present, the potential future CGT saving is £1k.

So is it worth spending costs of £200 now for that potential future CGT saving? If it were a definite current saving, clearly the answer would be yes. If it were a definite future saving, the answer would basically depend on whether you could grow the £200 to more than £1k before it happened, so on the answers to "how long in the future?" and "what long-term return rate do I want to assume I could achieve on the £200?". But for instance, if one wants to assume one can achieve 8% long-term, the answer is that it's a good idea if the saving is no more than 20 years in the future. But with it only being a potential future saving, one also has to factor in the chance of it not happening at all, and that has to take all sorts of personal factors into account, such as one's age and state of health (which clearly affect the likelihood of death preventing it from happening) and how much one tinkers (which clearly affects the likelihood of one deciding to realise the future gain even when it isn't being forced by takeover). So anyone in the situation of having to consider CGT (by no means all HYPers are!) will have to assess it for themselves. FWIW, for my personal circumstances and preferences about how I run my HYP, I would find it a decidedly marginal decision and I'm uncertain what decision I would come to.

The percentage gain on the share being sold matters quite a bit for that. For instance, if it is a holding bought for £10k and now worth £15k, having risen 50% (or the appropriate top slice out of a bigger holding that has risen 50%, such as a third of a holding bought for £30k and now worth £45k), then a similar calculation says that the cost of the potential future £1k CGT saving reduces quite a lot to about £75 stamp duty + £20 commissions + £15 bid/offer spread = £110. Something bought for £5k and currently worth £10k (a rise of 100%) would be even better, with costs of about £50 stamp duty + £20 commissions + £10 bid/offer spread = £80. And in the opposite direction, something bought for £50k and currently worth £55k (a rise of 10%) considerably worse - the costs are about £275 stamp duty + £20 commissions + £55 bid/offer spread = £350.

So basically, when doing this, one should think of using the holdings on which one has the highest percentage gains first, and not bother considering anything with a percentage gain under a threshold, which will depend on one's personal circumstances and preferences. For me, the above indicates that my own threshold is probably somewhere in the region of 20% - but it's not actually something I've had to consider for a few years, and at least one important aspect of my personal circumstances has changed quite markedly in the last couple of years. The reason that I've not had to consider it is that I've been fortunate enough to realise very substantial gains in my non-HYP investments in each recent year, partly as a result of takeovers and partly because my largest smallcap holding has repeatedly risen to my too-many-eggs-in-that-basket point, prompting me to top-slice it (which is a somewhat tricky procedure when one is making large sales of a smallcap, but that's too much of an off-topic detour!). As a result, my CGT problem has not been to realise gains to use up my CGT allowance, but to realise losses to bring my net gains down to the CGT allowance, or at least closer to it. The economics of that are quite a lot better, both because (unlike the gain) the loss can be greater than the sale proceeds and because the CGT saving is a definite near-future one, due just under 10 months from now. I didn't manage to reduce my net gains all the way to the CGT allowance for the 2018/2019 tax year, but did take it a very substantial part of the way with decisions to sell off other smallcaps that had not done so well and were not showing signs of improvement in my view, and yesterday I reduced them a useful amount further by biting the bullet and tinkering Sainsbury out of my HYP. The holding was sitting on a ~36% loss, making its sale value ~64% of what I paid for it and the loss ~36% of what I paid for it, so the loss was about 36/64 = 56% of the sale proceeds and the 20% CGT saving on that is about 11% of the sale proceeds. Stamp duty when I reinvest it (probably on Monday) will be about 0.5% of the sale proceeds, and other costs will add a bit to that, but the total will certainly be under 1% of the sale proceeds. So the costs I'm putting into the tinkering will be returned over 10 times in CGT savings at the end of January next year - not a bad return!

I should also add that Sainsbury was also a share whose place in my HYP wasn't secure anyway - it's definitely gone downhill as a HYP candidate since I bought it in 2013. And it was in one of the two remaining sectors I was more than doubled-up in (*), and unlike the other one (property/REITs), it isn't one I'm all that keen on even being doubled-up in. So basically, the CGT reduction opportunity wasn't the only reason for tinkering Sainsbury out of my HYP - it's just the final rather substantial straw that pushed me into doing something I'd dithered over before!

(*) My other two food retailers/Supermarkets are Morrison and Marks & Spencer (which isn't enough of a food retailer to make the sector properly tripled-up, but it is enough to make it IMHO rather more than doubled-up).

Gengulphus