Discussion
Mr Pointy said:
I'll ask here as this might help others: if I have a GIA with Vanguard & switch from Lifestrategy 40 to say LS 80 is that a CGT triggering event? I've a nasty suspicion that it is.
Yup. But you can sell up to your CGT allowance of course, if you haven't used any this current FY.John is correct, the fund switch is indeed a CGT event, but you do have your annual GCT Allowance.
This means you can switch (or withdraw) funds that have received a £12k gain (so, £1ook that has growth to £112k, for example) without having any tax to pay.
Your CGT rate is also linked to your income, being 10% if this is below £50k in the the year concerned and 20% if your income in that year is above 20k ( increasing to 18% and 28% respectively for residential property).
This raises two important points:
1) I often hear people say ISAs are not important as you have your annual CGT allowance. This proves just how important they can be as there is none of this complication with money held in an ISA (and pensions/SIPPS are not event subject to CGT).
2) If you have flexibility on drawing your income (i.e. are a business owner or are in retirement) then with good financial planning (which is different to financial advice) then it may be possible to structure your income in the year you make a CGT event so as to very much reduce the CGT payable.
For example, and assuming a £100k withdrawal or fund switch of which £50k is a capital gain:
a) If you pay tax at the higher rate then your taxable gain of £50k, minus your £12k CGT allowance becomes £38k which will be taxed at 20%.
Total CGT bill is therefore £7,600 and you need to add your income tax bill on top of this to get your entire tax bill for the year.
b) if you restructure your income for that year so that it is £12k. This all sits within your annual income tax allowance leaving you with £37.5k of basic rate allowance to play with. This means on the same disposal £37.5k will now be taxed at 10% and only £500 taxed at 20%.
Your total entire tax bill for the year is now just £3,850.
So whilst this is a bit of a faff for something like a fund switch, it is an excellent method of withdrawing GIA money at a very low tax rate.
In this example you are drawing out £112k and only paying £3,850 in tax. Even taking into account £50k of this was simply a return of capital, the remaining £62k has an effective tax rate of 6.21%!
John - Give me a bell this morning if you would like to chat about this.
This means you can switch (or withdraw) funds that have received a £12k gain (so, £1ook that has growth to £112k, for example) without having any tax to pay.
Your CGT rate is also linked to your income, being 10% if this is below £50k in the the year concerned and 20% if your income in that year is above 20k ( increasing to 18% and 28% respectively for residential property).
This raises two important points:
1) I often hear people say ISAs are not important as you have your annual CGT allowance. This proves just how important they can be as there is none of this complication with money held in an ISA (and pensions/SIPPS are not event subject to CGT).
2) If you have flexibility on drawing your income (i.e. are a business owner or are in retirement) then with good financial planning (which is different to financial advice) then it may be possible to structure your income in the year you make a CGT event so as to very much reduce the CGT payable.
For example, and assuming a £100k withdrawal or fund switch of which £50k is a capital gain:
a) If you pay tax at the higher rate then your taxable gain of £50k, minus your £12k CGT allowance becomes £38k which will be taxed at 20%.
Total CGT bill is therefore £7,600 and you need to add your income tax bill on top of this to get your entire tax bill for the year.
b) if you restructure your income for that year so that it is £12k. This all sits within your annual income tax allowance leaving you with £37.5k of basic rate allowance to play with. This means on the same disposal £37.5k will now be taxed at 10% and only £500 taxed at 20%.
Your total entire tax bill for the year is now just £3,850.
So whilst this is a bit of a faff for something like a fund switch, it is an excellent method of withdrawing GIA money at a very low tax rate.
In this example you are drawing out £112k and only paying £3,850 in tax. Even taking into account £50k of this was simply a return of capital, the remaining £62k has an effective tax rate of 6.21%!
John - Give me a bell this morning if you would like to chat about this.
Gassing Station | Finance | Top of Page | What's New | My Stuff