The Lemon Fool

As mentioned on the practical board my holding in SEGRO was over weight and in need of a haircut. So today on a Halifax cheap dealing day I sold 25% of my SGRO holding in my ISA, bought BT shares with the money and sold 90% of my BT holding outside my ISA. So I have now transferred 90% of my BT holding into my ISA with the aim of reducing my dividends this year below the dividend allowance of £2000. I will be transferring in shares to the value of this years ISA allowance, but at the moment that will still leave the proceeds of the SGRO sale as cash, but now outside my ISA (until next year at the earliest). So what can I do with the cash? I have a significantly large % of the £1000 0% tax band for interest un-used so was thinking of buying retail bonds as putting the money in a bank savings account is going to make paltry returns and I'm assuming that bond interest would count towards the £1000 tax free band on savings income? Thoughts?

My immediate thought is that you could find a bond maturing during the next financial year, if one exists, and hold to maturity.

TJH

Why not just hold the cash? It is, some say, the most liquid and risk free asset you can own after all.

I once considered buying money market funds with surplus cash - specifically JP Morgan Managed Cash (JPEC.L). But it then soon dawned that (even within an ISA wrapper) transaction + stamp costs alone would probably wipe out any short term gains, and that I was probably overcomplicating unnecessarily. I am still burdened with an offset mortgage, one silver lining of which is that it is the most practical place for me to park cash when I need to.

My immediate thought is the old saying "Don't let the tax tail wag the investment dog". There are times that saying should be ignored - for example, there are situations involving unsheltered shareholdings which have suffered massive losses where it's the tax effect that is the "dog" and the remaining investment value of the shares a comparatively small "tail". But there's a great deal of wisdom in it in most cases.

In particular, basic-rate (*) tax on dividends is 7.5%, which is the lowest of all the non-zero Income Tax and CGT rates. Its effect on a shareholding with say a 5% yield is a cost of 7.5% of 5% = 0.375% of the value of the holding per year. That's not a negligible cost - but it's not worth sacrificing significant investment returns to avoid it!

So I'd suggest you've got your decision-making the wrong way around: first decide which investments you think will give you the best returns with an acceptably low level of risk, then if it's close at the top take a look at whether tax effects change the order. Not first decide that you don't want to pay any tax, then only even consider investments for which that's possible!

(*) I assume you're a basic-rate taxpayer because you mention the £1,000 savings allowance - if you were higher-rate or above, it would be only £500 or nothing at all.

Gengulphus

daveh wrote:was thinking of buying retail bonds as putting the money in a bank savings account is going to make paltry returns and I'm assuming that bond interest would count towards the £1000 tax free band on savings income? Thoughts?

A Corporate Bond ETF could be a possibility to avoid the specific Company risk of buying a Retail Bond. A much higher return than cash, at a volatility risk cost of course.