CGT calculations - living off capital
Discussion
Illustrative numbers for longer term planning. Please ignore tax rates and bands, as it's the concept I'm interested in (as it likely won't be a UK based scenario).
Say I have £2,000,000 (with no tax owing) that I invest and get a 3% return pa. Let's assume that it's all invested in a single global tracker ETF to keep things simple. At the end of the year I have no income and my living expenses for next year are going to be £100,000. My portfolio is now worth £2,060,000 and I need to withdraw the £100,000.
How do I calculate the amount on which CGT is owed? Is it on a last in first out basis, so I would calculate CGT on the £60k increase in the portfolio value? Is it first in first out, so I wouldn't be liable for any CGT or is there some sort of weighted average calculation e.g. 3% (the growth component) of the withdrawal is deemed liable to be assessed for CGT? Or something else entirely?
Thanks
Say I have £2,000,000 (with no tax owing) that I invest and get a 3% return pa. Let's assume that it's all invested in a single global tracker ETF to keep things simple. At the end of the year I have no income and my living expenses for next year are going to be £100,000. My portfolio is now worth £2,060,000 and I need to withdraw the £100,000.
How do I calculate the amount on which CGT is owed? Is it on a last in first out basis, so I would calculate CGT on the £60k increase in the portfolio value? Is it first in first out, so I wouldn't be liable for any CGT or is there some sort of weighted average calculation e.g. 3% (the growth component) of the withdrawal is deemed liable to be assessed for CGT? Or something else entirely?
Thanks
It can get moderately complex. But the basic rule of thumb is that gain realisations are calculated based on the average purchase price of the asset that you have bought.
So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
deckster said:
It can get moderately complex. But the basic rule of thumb is that gain realisations are calculated based on the average purchase price of the asset that you have bought.
So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
Thanks. That makes sense. So initial CGT would be negligible, but over time unless you had some sort of smoothing strategy (selling and re-buying to crystallise a gain) it could potentially get quite painful. That's going to be fun to model!So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
eyebeebe said:
Thanks. That makes sense. So initial CGT would be negligible, but over time unless you had some sort of smoothing strategy (selling and re-buying to crystallise a gain) it could potentially get quite painful. That's going to be fun to model!
It's a common strategy - like the old bed & breakfast for shares. Of course you have to do it a couple of weeks before the end of the tax year which means guessing how much profit you'll actually make when the sale goes through. You can't buy back the same stock/fund within 30 days of the sale either, although this doesn't apply if you bed & ISA. In the UK it's governed by the "share matching rules" which are well documented elsewhere but in a nutshell it's any purchase & sale on the same day, then any purchase within 30 days after sale (to prevent B&B as alluded to above), then the rest being pooled and treated as a single holding (known as a "Section 104" holding).
Again made up numbers.
You have £2 million
It rises to £3 million over a decade
£1 million gain
You sell £100k to fund your living expenses
20% CGT has to be paid
Pretty painful, especially if you aren’t massively outperforming inflation as your initial pot has remained static in terms of buying power and yet you are taxed on your taxed money.
Are there any techniques to mitigate this? Move to Portugal?
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
You have £2 million
It rises to £3 million over a decade
£1 million gain
You sell £100k to fund your living expenses
20% CGT has to be paid
Pretty painful, especially if you aren’t massively outperforming inflation as your initial pot has remained static in terms of buying power and yet you are taxed on your taxed money.
Are there any techniques to mitigate this? Move to Portugal?
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
dmahon said:
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
Yeah same here.10 years is £200,000, but tax free! And compounding up the actual sum in the wrapper could get pretty big.
Anyone who had £100k in S&S ISA in 2010 in FAANGS would have £1,000,000+ of tax free ISA now.
dmahon said:
Again made up numbers.
You have £2 million
It rises to £3 million over a decade
£1 million gain
You sell £100k to fund your living expenses
20% CGT has to be paid
Pretty painful, especially if you aren’t massively outperforming inflation as your initial pot has remained static in terms of buying power and yet you are taxed on your taxed money.
Are there any techniques to mitigate this? Move to Portugal?
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
I'm lucky in some respects that the accumulation phase is in Switzerland where we don't have capital gains taxes, so I will crystallise all gains shortly before leaving. We do have a wealth tax though. You have £2 million
It rises to £3 million over a decade
£1 million gain
You sell £100k to fund your living expenses
20% CGT has to be paid
Pretty painful, especially if you aren’t massively outperforming inflation as your initial pot has remained static in terms of buying power and yet you are taxed on your taxed money.
Are there any techniques to mitigate this? Move to Portugal?
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
The plan is to move to Spain (via a hop to the UK to liberate some Swiss pension capital tax free) which sadly has both an investment gains tax (capital and dividend income) with no personal allowance and a wealth tax, which is more serious than the Swiss one. Seems the wealth tax will have more of an impact on our situation than any unmitigated capital gains, *if* I modelled it correctly. That will pale into insignificance versus the tax on pensions when they are ultimately paid.
The research I've done so far suggests that you can use Spanish compliant offshore bonds to reduce the wealth and investment taxes, but the fees look horrendous and with no knowledge of this kind of product it seems a bit shady.
I have access to Spanish and UK tax experts through work, but I want to get things straight in my head before approaching them and using up goodwill asking numpty questions!
deckster said:
It can get moderately complex. But the basic rule of thumb is that gain realisations are calculated based on the average purchase price of the asset that you have bought.
So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
So am I right in thinking with this example of a £3000 capital gain for the year, you wouldn't have any tax to pay (with the allowance being £12300) or have I got totally the wrong end of the stick ?So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
dmahon said:
Again made up numbers.
You have £2 million
It rises to £3 million over a decade
£1 million gain
You sell £100k to fund your living expenses
20% CGT has to be paid
Pretty painful, especially if you aren’t massively outperforming inflation as your initial pot has remained static in terms of buying power and yet you are taxed on your taxed money.
Are there any techniques to mitigate this? Move to Portugal?
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
Some of that 100k will be capital so it’s not tax on the whole lot.You have £2 million
It rises to £3 million over a decade
£1 million gain
You sell £100k to fund your living expenses
20% CGT has to be paid
Pretty painful, especially if you aren’t massively outperforming inflation as your initial pot has remained static in terms of buying power and yet you are taxed on your taxed money.
Are there any techniques to mitigate this? Move to Portugal?
I’ve wasted a lot of ISA and Pension allowance over the years. Regretting that a bit now.
supersport said:
Some of that 100k will be capital so it’s not tax on the whole lot.
If I’ve understood properly then to go from 2m to 3m is c.4% per annum return, so using the unit cost as 1000, the price after 10 years increases to 1480. To release 100000 you’d need to sell 67 units. So the capital gain is (1480-1000) x 67 units so the gain is 32495 which is what you’d pay CGT on. (Slightly rough numbers and there’s probably a quicker way of calculating it)eyebeebe said:
If I’ve understood properly then to go from 2m to 3m is c.4% per annum return, so using the unit cost as 1000, the price after 10 years increases to 1480. To release 100000 you’d need to sell 67 units. So the capital gain is (1480-1000) x 67 units so the gain is 32495 which is what you’d pay CGT on. (Slightly rough numbers and there’s probably a quicker way of calculating it)
Thanks for that. The kids might get an inheritance after all.BlackG7R said:
deckster said:
It can get moderately complex. But the basic rule of thumb is that gain realisations are calculated based on the average purchase price of the asset that you have bought.
So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
So am I right in thinking with this example of a £3000 capital gain for the year, you wouldn't have any tax to pay (with the allowance being £12300) or have I got totally the wrong end of the stick ?So let's say that you bought 2,000 units of your ETF at a price of £1,000 per unit. Now a year later, the price of the ETF is 3% higher, and you're selling £100k worth, so to keep things simple let's say that's 100 units at £1,030. From the £103,000 that you have made on the sale, take off the average purchase price (100 x £1000) which leaves you with a capital gain of £3000.
It's pretty straightforward until you start buying and selling additional blocks of the same asset at different times and prices, although most decent brokers will keep track of the average purchase price for you.
eyebeebe said:
I'm lucky in some respects that the accumulation phase is in Switzerland where we don't have capital gains taxes, so I will crystallise all gains shortly before leaving. We do have a wealth tax though.
The plan is to move to Spain (via a hop to the UK to liberate some Swiss pension capital tax free) which sadly has both an investment gains tax (capital and dividend income) with no personal allowance and a wealth tax, which is more serious than the Swiss one. Seems the wealth tax will have more of an impact on our situation than any unmitigated capital gains, *if* I modelled it correctly. That will pale into insignificance versus the tax on pensions when they are ultimately paid.
The research I've done so far suggests that you can use Spanish compliant offshore bonds to reduce the wealth and investment taxes, but the fees look horrendous and with no knowledge of this kind of product it seems a bit shady.
I have access to Spanish and UK tax experts through work, but I want to get things straight in my head before approaching them and using up goodwill asking numpty questions!
I'm very far from an expert but I would have a close look at Portugal. I did some reading and it looks like you can be tax resident in Portugal and spend a tiny amount of time there. It might be worth looking at it as an option given the savings!The plan is to move to Spain (via a hop to the UK to liberate some Swiss pension capital tax free) which sadly has both an investment gains tax (capital and dividend income) with no personal allowance and a wealth tax, which is more serious than the Swiss one. Seems the wealth tax will have more of an impact on our situation than any unmitigated capital gains, *if* I modelled it correctly. That will pale into insignificance versus the tax on pensions when they are ultimately paid.
The research I've done so far suggests that you can use Spanish compliant offshore bonds to reduce the wealth and investment taxes, but the fees look horrendous and with no knowledge of this kind of product it seems a bit shady.
I have access to Spanish and UK tax experts through work, but I want to get things straight in my head before approaching them and using up goodwill asking numpty questions!
Well hopefully you will be reaping more than 3%, although we can"t see into the future, the last 10 years have produced av gains of of a tad under 10%.
Conservative draw down of 3.5% etc etc.
So monthly eating money would be transferred into a current account from your cash holdings in the two mill. The cash within the two mill would be monitored and replenished when needed and at a time convenient to you.
Remember, tax is only due on realised cap Gees
Don't think you have to keep selling stuff every Month, that isn't how it's done. That would be a hellava lot of work, you would also maybe get xxxxxx up by a falling market.
Just keep 2 years cash, then relax and enjoy your index linked income
Conservative draw down of 3.5% etc etc.
So monthly eating money would be transferred into a current account from your cash holdings in the two mill. The cash within the two mill would be monitored and replenished when needed and at a time convenient to you.
Remember, tax is only due on realised cap Gees
Don't think you have to keep selling stuff every Month, that isn't how it's done. That would be a hellava lot of work, you would also maybe get xxxxxx up by a falling market.
Just keep 2 years cash, then relax and enjoy your index linked income
NorthDave said:
I'm very far from an expert but I would have a close look at Portugal. I did some reading and it looks like you can be tax resident in Portugal and spend a tiny amount of time there. It might be worth looking at it as an option given the savings!
I’ve done a little bit of research on this, but would need to do a lot more. From what I can tell the Portuguese NHR scheme is favourable for pension income (10%), but not for capital gains (27%). They don’t have a wealth tax though, which is a consideration. It doesn’t seem difficult to convince you to take you, I just wonder how difficult it is to convince where you really live not to tax you as a resident. jeff m said:
Well hopefully you will be reaping more than 3%, although we can"t see into the future, the last 10 years have produced av gains of of a tad under 10%.
Conservative draw down of 3.5% etc etc.
So monthly eating money would be transferred into a current account from your cash holdings in the two mill. The cash within the two mill would be monitored and replenished when needed and at a time convenient to you.
Remember, tax is only due on realised cap Gees
Don't think you have to keep selling stuff every Month, that isn't how it's done. That would be a hellava lot of work, you would also maybe get xxxxxx up by a falling market.
Just keep 2 years cash, then relax and enjoy your index linked income
I did say they were theoretical numbers, so I could understand the concept. My gains are much more then 3%, but I’m under no illusions that we are in the longest bull run (apart from the short covid blip) ever. For my planning though I do use a conservative 3% after inflation assumption, despite having a 100% equity portfolio (save for a bit of physical gold and am about to go into a PE fund that should provide some juicy returns). Conservative draw down of 3.5% etc etc.
So monthly eating money would be transferred into a current account from your cash holdings in the two mill. The cash within the two mill would be monitored and replenished when needed and at a time convenient to you.
Remember, tax is only due on realised cap Gees
Don't think you have to keep selling stuff every Month, that isn't how it's done. That would be a hellava lot of work, you would also maybe get xxxxxx up by a falling market.
Just keep 2 years cash, then relax and enjoy your index linked income
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