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CGT / Income swap across tax years

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Zebedee71
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CGT / Income swap across tax years

#192343

Postby Zebedee71 » January 10th, 2019, 10:58 am

odd question but would appreciate feedback and provoke discussion

The better half has triggered a large property CGT bill in 17/18 that will need to be paid in several months (or mitigated in 17/18) BUT she effectively has zero annual income and little next tax year also

so here's a thought
1) Can I find a low spread high yield investment that could be bought now cum div i.e. 17/18, which goes ex div in 17/18 but pays the actual divi in 18/19 - the investment would be sold in say late March upon ex div to trigger an expected CGT loss
2) The CGT tax saving on the loss would be at the full marginal rate which is worth having to offset the real estate gain
3) The problem I see are threefold
a) My CGT tax knowledge is "pants" and hence my logic/thinking may be wrong
b) There are no obvious high enough yield investments that make the "hill worth the climb" vs the risks e.g. buy/sell spreads/economy crash
c) There may be better/easier ways to flip/reduce the gain (I ain't no tax or investment expert but willing to research)

I have dabbled in bank bonds over the years and the likes of NWBD/SAN would work but b) kicks in. Alternatively something like Co-op 42TF might have been interesting (large divi and larger ex div) but the boat sailed on that one in December 2018 if my understanding is correct

thanks for any thoughts - its an interesting position to be actually looking for CGT losses

Z71

Alaric
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Re: CGT / Income swap across tax years

#192367

Postby Alaric » January 10th, 2019, 12:21 pm

Zebedee71 wrote:
The better half


It only works for married couples, but if you have assets standing at a loss, you give them to the other half and they sell, incurring the loss.

Otherwise, as you say, opportunities for the conversion of income to gain or vice versa are limited. Not totally surprising given the scope for tax avoidance this could offer.

PinkDalek
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Re: CGT / Income swap across tax years

#192377

Postby PinkDalek » January 10th, 2019, 1:23 pm

Zebedee71 wrote:The better half has triggered a large property CGT bill in 17/18 that will need to be paid in several months (or mitigated in 17/18) BUT she effectively has zero annual income and little next tax year also ...


Please confirm the tax year of disposal - I think you might mean 2018-19 as against 2017-18.

Also what type of property is it? Residential or commercial or commercial with residential included? I ask in view of the applicable CGT rates outlined here https://www.gov.uk/guidance/capital-gai ... #rate-gain

As for Co-op 42TF etc, do they not pay interest as against dividends? I may be wrong but wouldn't what you propose be impacted by the Accrued income Scheme, such that the cum part gets dealt with in the interest calculations and doesn't result in a CGT loss?

See https://www.gov.uk/government/publicati ... cheme-2016

There are, of course, other options to defer CGT but these come with significant risks attached. Such as venture capital schemes:

https://www.gov.uk/guidance/venture-cap ... tax-relief

Zebedee71
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Re: CGT / Income swap across tax years

#192503

Postby Zebedee71 » January 10th, 2019, 5:39 pm

Thks Alaric / PD for your thoughts

1) AL- Hadn't thought about existing spouse losses and transferring/utilising them - somewhere I have some assets that would crystallise a loss so will look into that
2) PD well spotted
- I meant he gain crystallised in (October) 18/19 and will need to pay later in 19/20
- relates to a complex residential property disposal so will look at the rates
- Oddly I thought 42TF would be traded with accrued income etc but that was not the case upon a recent purchase via selftrade where they were bought "clean" (ex accrued) + stamp duty so I was working on that basis. In any event 42TF does not work in this case as she starts with 0 and the divi/interest was paid in Dec 2018 (PS many years ago I gave up trying to understand the clean v dirty debate as it seemed various trading platforms had their own rules and arguing with then was a lost cause)

I guess its not surprising that its not meant to be easy to crystallise CGT losses in one tax year into interest income the next (e.g. SAN) but simplistically I looked at it as a "no-lose" scenario providing the trading (in and out/spread) costs were not exorbitant. However I have no desire to proceed if it delves into complex instruments or transactions

ta
Z71

Lootman
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Re: CGT / Income swap across tax years

#192508

Postby Lootman » January 10th, 2019, 5:57 pm

Zebedee71 wrote:I guess its not surprising that its not meant to be easy to crystallise CGT losses in one tax year into interest income the next (e.g. SAN) but simplistically I looked at it as a "no-lose" scenario providing the trading (in and out/spread) costs were not exorbitant. However I have no desire to proceed if it delves into complex instruments or transactions.

I have in the past given consideration to strategies that artificially create a capital loss to offset a large unavoidable capital gain in the same tax year.

In particularly I looked at two possibilities. The first was using split-capital investment trusts. There is often a class of share, called an "income share" or "annuity share", which pays very large dividends and whose capital value declines over time, sometimes to a maturity value of zero. Such a share might for instance have a dividend yield of, say, 20%, and a life of six years. It might see a capital value of 100 decrement to 0 over that time.

What you're really doing there is trading capital gains for dividend income. The problem is that there aren't many of these issues left any more, which is a shame because they were useful for tax planning - the Zeroes had the opposite trend, giving you no income but a pre-determined capital gain at maturity.(*)

The other method would involve using long-dated options, called LEAPS. You'd take two equal and opposite positions, with the idea that you'd liquidate whichever one of them showed a loss in one tax year, and close out the other one in a following tax year. This doesn't avoid a capital gain but it does give you some control over which tax year to take it in. You're basically rolling forward and postponing the gain. It's not without risk although you might be able to hedge that when you close out the first position. Ideally you'd continually push forward that pregnant gain until death, whereupon it gets wiped out anyway.

I'm not recommending either of these strategies. I am merely showing how they might typically work.

(*) I have wondered whether such a strategy might also work for IHT. Basically you are converting wealth into income. The rules for gifting from income are more generous than gifting from capital. But I digress :D

strophe
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Re: CGT / Income swap across tax years

#192512

Postby strophe » January 10th, 2019, 6:03 pm

Perhaps take a look at RDL. It's a former P2P investment trust, now in liquidation, but for some reason they are returning capital via dividends.

The underlying investments are loans, so it should have a reasonably low correlation to the general markets, although I imagine a recession would have some impact.

Edit: I've just realised you need something that pays a distribution before the end of the tax year. RDL have just paid a large dividend, and there's no guarantee they'll pay another before then. Worth keeping an eye on nevertheless.

Alaric
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Re: CGT / Income swap across tax years

#192562

Postby Alaric » January 10th, 2019, 8:47 pm

Lootman wrote: You'd take two equal and opposite positions, with the idea that you'd liquidate whichever one of them showed a loss in one tax year, and close out the other one in a following tax year.


Another idea was mentioned on this site not so long ago. You invest in a tracker fund. If the market goes down before the end of the tax year, you sell the first tracker fund and repurchase another fund tracking the same index. If the market goes up, you don't do anything. It's at best only a partial solution.

(Under normal circumstance, you only sell when the market goes up. It's just an attempt to harvest the annual exempt amount)

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Re: CGT / Income swap across tax years

#192566

Postby Lootman » January 10th, 2019, 8:51 pm

Alaric wrote:
Lootman wrote: You'd take two equal and opposite positions, with the idea that you'd liquidate whichever one of them showed a loss in one tax year, and close out the other one in a following tax year.

Another idea was mentioned on this site not so long ago. You invest in a tracker fund. If the market goes down before the end of the tax year, you sell the first tracker fund and repurchase another fund tracking the same index. If the market goes up, you don't do anything. It's at best only a partial solution.

(Under normal circumstance, you only sell when the market goes up. It's just an attempt to harvest the annual exempt amount)

That might work but I think the issue here is one of scale. In order to establish a loss of significant size, then you probably need to employ leverage. A long and a short position using derivatives could achieve that. I'm not sure long-only positions in trackers could, unless the amount you have available to invest is large relative to the size of the gain you are trying to make "disappear"

helfordpirate
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Re: CGT / Income swap across tax years

#192798

Postby helfordpirate » January 11th, 2019, 3:58 pm

Just a warning...!

There are a lot of mentions in the thread above to "creating an artificial loss" to offset against a potential capital gain - this may involve a series of linked transactions, spousal transfers and matched options etc.

This is specifically addressed by legislation in TCGA92/S16A called TAAR - targetted anti-avoidance rules, This is very wide ranging legislation that allows HMRC to refuse an allowable loss if it believes it is part of a series of transactions where the purpose was to create an artificial loss i.e. a loss created where there is no genuine economic transaction. The CGT manual helpfully gives some examples of methods to create artificial losses here https://www.gov.uk/hmrc-internal-manual ... al/cg-app9 !

It is fair to say that articles I have read around the subject don't agree on HMRC's interpretation - in fact many argue it in fact has wider powers but is choosing not to apply them.


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