Portfolio producing annual capital gains not dividends

[xx101]

Hello All

I am wondering if it is possible to create a portfolio to make use of the annual UK personal capital gains annual tax allowance of approx. £12k per annum.

Having been a "Motley Lemon" for some years I already have a collection of HYP, Prefs and IT's inside SIPP an ISA's and am looking at investing outside these tax wrappers.

Whats the required size of the investment ?
With a risk profile similar to a basket of IT's like say the Basket of 7 or 8 the annual return would be say 4%.
This means as a £300k portfolio would give a £12k annual return which suggest a minimum portfolio size.

Dividends if any preferably not above the £2k UK annual tax allowance, otherwise attracting 40% tax.

So what could the portfolio compromise and how could it have some certainty of operation?

Portfolio of shares?
I am not really up top date with bed and breakfasting and would appreciate and update or pointer to a relevant article, this would also involve some active management of gains at end of year, and some variability in results. But generally understand how capital gains
could be harvested from a portfolio of shares.

Buy Berkshire Hathaway as it does not pay a dividend..

However is it possible to achieve the aims in a more structured way?

Are ether specific accumulation rather then dividend products available and any suggestions?

Thanks and have a good weekend

xx101

[TUK020]

One idea is to use index trackers with strong overlap, to enable you to trade assets, but avoid exposure to being out of the market for the required capital gains period (30 days?).
E.g. buy FTSe 100 tracker. With fair fortune, a gain made can be 'banked' by selling a chunk, and switching the funds to an equivalent of the total market (FTSE100 accounts for 96% of total stock exchange capitalisation). Subsequently switch back.
Read up on the CGT rules.

[Alaric]

I am wondering if it is possible to create a portfolio to make use of the annual UK personal capital gains annual tax allowance of approx. £12k per annum.

It's somewhat hit or miss, particularly using whole market trackers, as there will be years during which the market as a whole does a nose dive.

As a general principle, you would pick stocks or funds with nil or very small dividends, where hopefully you can sell enough to make a gain just inside the CGT allowance. Provided you reinvest into something else, you won't get caught by anti bed and breakfast rules. If your ISA allowance isn't utilised, you can always reinvest the proceeds there.

[Lootman]

I am wondering if it is possible to create a portfolio to make use of the annual UK personal capital gains annual tax allowance of approx. £12k per annum.

It's somewhat hit or miss, particularly using whole market trackers, as there will be years during which the market as a whole does a nose dive.

Zero dividend preference shares give a pre-determined capital gain, that is more or less guaranteed if held to maturity, and they are fairly safe. I'd say very safe but the split-capital IT problems at the beginning of the century showed that there are still risks.

The problem is that it's been a shrinking market for a number of years now, and you can no longer put together a portfolio of them with laddered maturities. But they used to be a handy tax solution for problems like this, and might still be worth taking a look at.

The other idea is to use options. An in-the-money call option is essentially a share substitute, minus the dividends. Call options are cheaper than you'd expect because of the absence of dividends (whilst put options are more expensive). You can buy long dated options that go out a couple of years or so. If you bought a mix of calls and puts then you'd always have some positions that show a profit.

[PinkDalek]

Dividends if any preferably not above the £2k UK annual tax allowance, otherwise attracting 40% tax.

Not an answer to your question but the top rate of Income Tax (for additional rate taxpayers) is not currently 40%:

https://www.gov.uk/tax-on-dividends

Tax band - Tax rate on dividends over your allowance

Basic rate = 7.5%
Higher rate = 32.5%
Additional rate = 38.1%

[Alaric]

If you bought a mix of calls and puts then you'd always have some positions that show a profit.

Can you be sure that the tax treatment would be that they were subject to CGT? I can recall something from over twenty years ago where it was possible to buy options that
(a) paid you if markets fell
(b) you paid if markets fell
(c) paid you if markets rose
(d) you paid if markets rose

The net effect being that if you bought all four you got the return on cash. This was attacked under anti-evasion rules or laws.

[Parky]

Hello All

I am wondering if it is possible to create a portfolio to make use of the annual UK personal capital gains annual tax allowance of approx. £12k per annum.


xx101

Holding BMO UK High Income B shares (BHIB) will achieve that. Despite its name, the "income" of the Investment Trust is paid out as a capital repayment, which is subject to CGT, not income tax. It is currently on a discount of 9% to NAV and the annual repayments are equivalent to a 5.6% yield. It is invested mainly in FTSE companies.


Disclosure - I hold shares in this IT.

[hiriskpaul]

One has to be very careful in letting the tax tail wag the investment dog. Avoidance measures can easily end up costing more overall than any tax saving. BHIB a case in point. Yes you only pay tax on distributions at CGT rates rather than income tax rates, or none at all if within the CGT threshold, but the performance of BHIB these last 5/10 years has been well below average for the UK equity income sector. They have not even kept up with the FTSE allshare despite their use of gearing in a soaring market.

There are a few simple things you can do to reduce taxes though, such as holding your higher income paying investments in tax shelters and the lower yielding investments outside. Another is to hold foreign shares outside tax shelters as the dividends often come with tax credits. For example, lets say you paid tax on dividends at 32.5%, held an S&P 500 ETF which was listed in New York and received a £10,000 gross dividend. You would lose £1,500 in US withholding tax, but that tax credit the £3,250 UK income tax, so overall you would only pay £3,250 total tax on the gross dividend. However, if you held an LSE listed S&P 500 ETF, domiciled in Ireland, the ETF would lose £1,500 in withholding tax and would then pay £2762.5 (32.5% * 8500) tax on the dividend from the ETF, for a total tax of £4,262.5. i.e. over £1000 more tax. US listed ETFs are hard for UK retail investors to buy now, but you also get tax credits on dividends from foreign shares.

[Alaric]

Another is to hold foreign shares outside tax shelters as the dividends often come with tax credits.

For the sake of an easier life when filling out Tax Returns, many do it the other way round. Put the foreign stuff into ISAs and SIPPs. But I see your point that for those taxed at the highest rates, there may be arbitrage in paying the foreign tax rather than the domestic one.

[BusyBumbleBee]

Predicting income from investments is difficult enough - predicting capital gains is even harder. I suggest you don't even try - just invest to the best of your ability and pay any taxes due. Of course putting as much as you can into tax shelters is a good idea and if your other investments have done well then you can realise some capital gains as you move an investment into an ISA.

My friends at school and university were baffled when I said I wanted to pay a lot of tax because they simply didn't understand you had to earn a lot to pay a lot of tax.

Personally, I have always been pleased to pay big CGT bills and would be even happier if they were higher.

[Parky]

One has to be very careful in letting the tax tail wag the investment dog. Avoidance measures can easily end up costing more overall than any tax saving. BHIB a case in point. Yes you only pay tax on distributions at CGT rates rather than income tax rates, or none at all if within the CGT threshold, but the performance of BHIB these last 5/10 years has been well below average for the UK equity income sector. They have not even kept up with the FTSE allshare despite their use of gearing in a soaring market.

I agree, the performance has not been wonderful, but the overall return is not exactly comparable to a dividend paying IT, because you don't pay the CGT until you sell the shares, so the capital repayments are compounded until the tax hit is taken. Also of course you can choose when to take the tax hit, which might be useful. However, this is getting a bit off-topic, so I'll say no more.

[Parky]

I should have said the capital repayments, if re-invested, are compounded.

[hiriskpaul]

It is possible to avoid paying income tax on accumulating ETF dividends by timing purchase and disposal around the reporting period end date. As an example, CSP1 is an iShares accumulating S&P 500 ETF. If you hold this on 31 July you are considered to have received the entire dividend for the whole year as "excess reportable income", but if you sell before this date and buy after you will not be considered to have received any income. So sell on 30 July, buy on 1 August you will not pay tax on the income. You will of course incur a capital gain or loss on the disposal on 30 July compared to the subsequent repurchase on 1 August because of the 30 day matching rule. If you did not want to take the risk of being out of the market between the 2 dates, simply buy a different S&P 500 ETF when CSP1 is sold and sell when you buy back CSP1. Preferably pick an ETF that does not go XD before the buyback, such as Vanguard's VUSA. If you did want to crystallise a capital gain, simply leave more than 30 days before selling and buying back. This sort of thing is only likely to be worthwhile for higher rate taxpayers due to the trading costs.

[Hariseldon58]

My own experience is that I harvest capital gains every year from a portfolio held with Mrs Hari. The 2 x £11,850 gains obviously produce a larger amount that is used to fund lifestyle and 2 x £20,000 isa contributions plus 2 x £2,880 SIPP contributions.

The total in the joint tax free accounts is a little under £400k and the amount in this account has been higher but in the same ballpark and I anticipate it will decline gently over time.

I can’t share a magic portfolio mix that generates such reliable gains as no such portfolio exists.... the embedded gains already in the portfolio are a very significant proportion of the portfolio... that comes from starting years ago and investing patiently with absolutely no intention, other than equity gains over the long term.

HiRiskpaul offers great insight in not letting the tax tail wag the dog....

[Pastcaring]

Predicting income from investments is difficult enough - predicting capital gains is even harder. I suggest you don't even try - just invest to the best of your ability and pay any taxes due. Of course putting as much as you can into tax shelters is a good idea and if your other investments have done well then you can realise some capital gains as you move an investment into an ISA.

My friends at school and university were baffled when I said I wanted to pay a lot of tax because they simply didn't understand you had to earn a lot to pay a lot of tax.

Personally, I have always been pleased to pay big CGT bills and would be even happier if they were higher.

Same for me,I' m baffled why people think not paying tax is great

Same problem here in Australia,huge industry built on telling ( selling) people advice on how to avoid tax.

I pay more than average wages in tax every year.

If I lived in the UK it would mean paying around £ 30K a year in tax.If you ever want to have a financial problem in life that is the one you really want to have.

I ' d be happier having the huge problem of paying £ 1 million in tax,I' ll never reach that sadly.

[colin]

Predicting income from investments is difficult enough - predicting capital gains is even harder. I suggest you don't even try - just invest to the best of your ability and pay any taxes due. Of course putting as much as you can into tax shelters is a good idea and if your other investments have done well then you can realise some capital gains as you move an investment into an ISA.

My friends at school and university were baffled when I said I wanted to pay a lot of tax because they simply didn't understand you had to earn a lot to pay a lot of tax.

Personally, I have always been pleased to pay big CGT bills and would be even happier if they were higher.

This attitude to tax does not take into account the reality that significant capital gains might well (and probably will) require many years if not decades to accumulate, but when the assets are sold we are taxed on the basis that the entire gain was earned in a single year, thus negating the benefits of compounding investment returns.

[Pastcaring]

Predicting income from investments is difficult enough - predicting capital gains is even harder. I suggest you don't even try - just invest to the best of your ability and pay any taxes due. Of course putting as much as you can into tax shelters is a good idea and if your other investments have done well then you can realise some capital gains as you move an investment into an ISA.

My friends at school and university were baffled when I said I wanted to pay a lot of tax because they simply didn't understand you had to earn a lot to pay a lot of tax.

Personally, I have always been pleased to pay big CGT bills and would be even happier if they were higher.

This attitude to tax does not take into account the reality that significant capital gains might well (and probably will) require many years if not decades to accumulate, but when the assets are sold we are taxed on the basis that the entire gain was earned in a single year, thus negating the benefits of compounding investment returns.

That is ridiculous.Decades to produce good gains is correct.Why would you need to sell anything?

To put numbers to it one share funds one third roughly of my dividend income,six figures net from that one company.

Why would I elect to pay CGT,you don't think life is easy getting by on a six figure income.Why would I have any reason at all to sell the goose laying the golden eggs.

The decades ,well,the share that cost $6 in 1990 is is now 5 shares all these years later,using the DRP.Those 5 shares are now worth around $370.They produce around $30 in annual income

As for CGT,well,no intention of selling them but shall we suppose I did.Shall we say $ 2 million worth built up over the decades,all at various prices.The tax man takes 30% ( $600k),that leaves me $1.4 million.I think that is a wonderful blessing,you keep telling yourself that is terrible.Why would anybody do that.

[tjh290633]

Have you ever heard of diversification? I suspect that you are overexposed to a few shares.

TJH

[BusyBumbleBee]

Have you ever heard of diversification? I suspect that you are overexposed to a few shares.TJH

Have you ever heard of "run your winners''? I agree with PastCaring hang on to the good 'uns. I have only had to pay CGT when I have had a 'forced' sale when the other investors in a company have wanted to sell out of a venture capital investments.

[hiriskpaul]

Have you ever heard of diversification? I suspect that you are overexposed to a few shares.TJH

Have you ever heard of "run your winners''? I agree with PastCaring hang on to the good 'uns. I have only had to pay CGT when I have had a 'forced' sale when the other investors in a company have wanted to sell out of a venture capital investments.

I think the "run your winners" mantra is a nonsense. Try telling that to someone who held big positions in say Enron or Lehmans. Running winners is something that is very tempting to do though and I am guilty of doing it myself. I hold a few "winners" now that I would have been better off selling a few years ago and it was largely the unwillingness to take a CGT hit that stopped me.

The most extreme example of running winners I know of is with a friend who has over 90% of his entire net worth in Microsoft shares which produce about 99% of his income. He sells enough each year to utilise his CGT annual allowance. He does admit the level of his exposure is mad, but cannot bring himself to sell more. A combination of unwillingness to pay CGT and giving up on what for him was a winning strategy.