Author Topic: How to invest after maxing out S&S ISA  (Read 617 times)

dutty

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How to invest after maxing out S&S ISA
« on: October 18, 2017, 02:05:05 PM »
Let's run a theoretical example.

I have £100,000 to invest between 06/04/2017 - 05/04/2018 (This is the ISA/financial year). Let's assume that I am in the basic rate tax band.

My target portfolio is 70% stocks and 30% bonds.

The S&S ISA contribution is capped at £20,000 per annum.

My main question is whether you think it would make more sense to use the whole £20,000 allowance for my stock investments, and then to invest the remaining £80,000 (including the whole bond allocation) without the tax shelter.

Any advice is greatly appreciated. 


AnswerIs42

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Re: How to invest after maxing out S&S ISA
« Reply #1 on: October 18, 2017, 03:36:48 PM »
Bonds should go in the ISA first. You get tax refunded on the bond interest if it's in an ISA.

For the equities it doesn't make all that much difference - you'll be under the £5000 dividend allowance so you won't be charged any extra income tax, and if you're bed-and-ISA-ing the remaining money every year you're unlikely to have capital gains tax issues.

Best to use income funds rather than accumulation funds outside the ISA, otherwise if capital gains does become an issue then calculating it can be a real PITA.

cerat0n1a

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Re: How to invest after maxing out S&S ISA
« Reply #2 on: October 19, 2017, 02:35:36 AM »
if capital gains does become an issue then calculating it can be a real PITA.

One of the oft overlooked big advantages of an ISA!

Dutty - I think the previous answer is spot on.

However, it might depend on your other investments - whether you already earn dividends or interest elsewhere and whether you will have another £100k to invest next year, or whether this is a one-off. If this wasn't a theoretical example, I'd probably say £40k into pension should be considered, too.

dutty

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Re: How to invest after maxing out S&S ISA
« Reply #3 on: October 19, 2017, 04:43:22 AM »
Bonds should go in the ISA first. You get tax refunded on the bond interest if it's in an ISA.

For the equities it doesn't make all that much difference - you'll be under the £5000 dividend allowance so you won't be charged any extra income tax, and if you're bed-and-ISA-ing the remaining money every year you're unlikely to have capital gains tax issues.

Best to use income funds rather than accumulation funds outside the ISA, otherwise if capital gains does become an issue then calculating it can be a real PITA.

Thanks for your replies. Could you clarify what bed-and-ISA-ing is? I am assuming it means holding onto cash until more allowance becomes available in the ISA? See below for another level of complication.

Can we now assume that this person will be looking to invest £100,000 each year for the next three years. And, uniquely their income from a job will be £0 each year. I understand that the dividend allowance will fall to £2000 at the beginning of the next financial year, but currently the dividend tax rate is only 7.5% and the capital gains tax rate is 10% for basic tax rate payers. The corresponding bond interest tax rate is 20% with a £1000 allowance.

Ok this is getting quite complicated but it does actually look like sheltering my bond allocation from taxes will be more profitable. Is there anything else I need to consider?


dreams_and_discoveries

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Re: How to invest after maxing out S&S ISA
« Reply #4 on: October 19, 2017, 05:09:59 AM »
I think we need more details here to give accurate advice. Where is the money coming from, is it one off or going to continue? What is the current financial situation?  Any debt that could be paid off? What is the end goal with the funds?

I'd put £40k in a pension, £20k in an ISA (And the same for a spouse if applicable)  if no spouse put the remainder in a taxable account and move it to an ISA over the next few years.

cerat0n1a

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Re: How to invest after maxing out S&S ISA
« Reply #5 on: October 19, 2017, 06:00:15 AM »

Thanks for your replies. Could you clarify what bed-and-ISA-ing is? I am assuming it eans holding onto cash until more allowance becomes available in the ISA?

Usually means selling shares that you own outside of the ISA (e.g. in late March) and then buying the same shares within the ISA when new ISA allowance becomes available in April.


Quote
Can we now assume that this person will be looking to invest £100,000 each year for the next three years. And, uniquely their income from a job will be £0 each year. I understand that the dividend allowance will fall to £2000 at the beginning of the next financial year, but currently the dividend tax rate is only 7.5% and the capital gains tax rate is 10% for basic tax rate payers. The corresponding bond interest tax rate is 20% with a £1000 allowance.

Quoting HMRC "You can use your Personal Allowance to earn interest tax-free if you havenít used it up on your wages, pension or other income." So with no income from a job, you'd be very unlikely to pay any tax on the bond interest, even outside the ISA.

dutty

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Re: How to invest after maxing out S&S ISA
« Reply #6 on: October 19, 2017, 06:32:44 AM »
I think we need more details here to give accurate advice. Where is the money coming from, is it one off or going to continue? What is the current financial situation?  Any debt that could be paid off? What is the end goal with the funds?

I'd put £40k in a pension, £20k in an ISA (And the same for a spouse if applicable)  if no spouse put the remainder in a taxable account and move it to an ISA over the next few years.

Without bogging too far down into the details of this cash, in the eyes of UK taxation it will be deemed gambling winnings and therefore tax exempt. I will have within the range of £50k-£130k to invest this year, and again in year 2, and then a bit less likely again in year 3, so we can call that range £30k-£100k. Beyond this I am wise to hold back on projections as things can and will change with regards to my income.

I do not have any debt (or for that matter any investments) and I am looking to become financially independent as soon as possible, I would love to be able to fund my expenses through my investments and some very flexible, enjoyable part time work.

Because I am 24 I am not particularly comfortable with locking up funds into a pension for the next 30 years considering I may be able to reach my version of FI within the next 4 years if I am intelligent and frugal.
« Last Edit: October 19, 2017, 06:55:40 AM by dutty »

dutty

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Re: How to invest after maxing out S&S ISA
« Reply #7 on: October 19, 2017, 06:41:25 AM »
Quote
Can we now assume that this person will be looking to invest £100,000 each year for the next three years. And, uniquely their income from a job will be £0 each year. I understand that the dividend allowance will fall to £2000 at the beginning of the next financial year, but currently the dividend tax rate is only 7.5% and the capital gains tax rate is 10% for basic tax rate payers. The corresponding bond interest tax rate is 20% with a £1000 allowance.

Quoting HMRC "You can use your Personal Allowance to earn interest tax-free if you havenít used it up on your wages, pension or other income." So with no income from a job, you'd be very unlikely to pay any tax on the bond interest, even outside the ISA.

Let's say hypothetically that I earn a dividend income of £10,000 above the new dividend allowance of £2000, and an interest income of £10,000 over the £1000 allowance, do you know which income would use up the £11,500 personal allowance first?

cerat0n1a

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Re: How to invest after maxing out S&S ISA
« Reply #8 on: October 19, 2017, 06:53:16 AM »
Let's say hypothetically that I earn a dividend income of £10,000 above the new dividend allowance of £2000, and an interest income of £10,000 over the £1000 allowance, do you know which income would use up the £11,500 personal allowance first?

Probably best to look here: https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet#examples

But in this specific example, you would have your £10 000 of interest income free of tax, plus £1500 of your dividend income, and then pay 7.5% on the remainder of the dividend income. (Remember that dividend income has to come from company profits which have already been taxed.) Also foreign dividends may have a different tax treatment.

It is perhaps also worth noting that although the cut of the dividend allowance from £5k to £2k for the next tax year was announced in the spring 2017 budget, it was not actually included in the Finance bill before the snap general election. So as things stand, it's possible that next year's allowance might remain at £5k.

dutty

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Re: How to invest after maxing out S&S ISA
« Reply #9 on: October 19, 2017, 07:11:19 AM »
Let's say hypothetically that I earn a dividend income of £10,000 above the new dividend allowance of £2000, and an interest income of £10,000 over the £1000 allowance, do you know which income would use up the £11,500 personal allowance first?

Probably best to look here: https://www.gov.uk/government/publications/dividend-allowance-factsheet/dividend-allowance-factsheet#examples

But in this specific example, you would have your £10 000 of interest income free of tax, plus £1500 of your dividend income, and then pay 7.5% on the remainder of the dividend income. (Remember that dividend income has to come from company profits which have already been taxed.) Also foreign dividends may have a different tax treatment.

It is perhaps also worth noting that although the cut of the dividend allowance from £5k to £2k for the next tax year was announced in the spring 2017 budget, it was not actually included in the Finance bill before the snap general election. So as things stand, it's possible that next year's allowance might remain at £5k.

So it looks like all my interest and dividend income will be sheltered for at least the first few years regardless of whether they are in an ISA or not, could you then make the case, as has been mentioned earlier, that putting the stocks into the ISA would prevent any complicated capital gains reportings? Although it is likely I would still have stocks invested outside of the ISA so these calculations would potentially still have to be made just with smaller figures. Damn this is going to be complicated. I should just pay a professional :)

Playing with Fire UK

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Re: How to invest after maxing out S&S ISA
« Reply #10 on: October 19, 2017, 07:37:37 AM »
Damn this is going to be complicated. I should just pay a professional :)

That's a joke, right? You should not be paying a professional for this. The work that you'd need to do to make sure that a professional has done it right is more than the work to do it.

Below a certain level of dividends and Capital Gains Tax (CGT), you don't need to tell HMRC anything; above that threshold you need to tell what you've done, but not pay tax; higher still and you'll need to pay tax. It is absolutely in your interests to max out the ISA allowances available to you.

If you invested £100k outside of an ISA and it gained £11k (not impossible), then you'd need to manage CGT after the first year.

Another thing you should look into is CGT harvesting. You don't need to do it before you start, but if you are buying income funds rather than accumulation funds it will make it easier (ignore people who say that accumulation funds mean you don't have to worry about dividends - they are well meaning but wrong - no-one on this thread, but I see it now and again on the boards). Set a reminder to read about it in February 2019, the Monevator article is good.

Does this hypothetical person have a trusted spouse or partner? What's the housing situation? LISA is nice if you're planning to by a first home at some point.

Also look into the treatment of bond/equity funds. You can hold bonds in a mixed fund (like the Vanguard Lifestrategy funds), and it is treated as dividends rather than income as long as there is a sufficient share of equities in the fund. I recall it is up to 40% bonds, but DYOR.


dutty

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Re: How to invest after maxing out S&S ISA
« Reply #11 on: October 19, 2017, 09:15:55 AM »
Damn this is going to be complicated. I should just pay a professional :)

That's a joke, right? You should not be paying a professional for this. The work that you'd need to do to make sure that a professional has done it right is more than the work to do it.


Very good point. Let's call it a pseudo joke that you have now transformed into a full joke.




If you invested £100k outside of an ISA and it gained £11k (not impossible), then you'd need to manage CGT after the first year.

Another thing you should look into is CGT harvesting. You don't need to do it before you start, but if you are buying income funds rather than accumulation funds it will make it easier (ignore people who say that accumulation funds mean you don't have to worry about dividends - they are well meaning but wrong - no-one on this thread, but I see it now and again on the boards). Set a reminder to read about it in February 2019, the Monevator article is good.

I have had a read up on some Monevator articles and things are becoming more clear. But a £11k+ gain only needs reporting when this gain has been realised? So this potentially gives me many more years where I can be creative and move the money around as is necessary, and over time the ISA can build.   



Does this hypothetical person have a trusted spouse or partner? What's the housing situation? LISA is nice if you're planning to by a first home at some point.

Also look into the treatment of bond/equity funds. You can hold bonds in a mixed fund (like the Vanguard Lifestrategy funds), and it is treated as dividends rather than income as long as there is a sufficient share of equities in the fund. I recall it is up to 40% bonds, but DYOR.

There is no partner and no desire to own property at the moment. That's interesting I had no idea about that, unfortunately the vanguard Lifestrategy funds are too heavily weighted towards the UK for my liking, although perhaps my 30% bond allocation could come from a 60/40 lifestrategy fund and then with the remaining 15% I could reallocate to try to rebalance the weightings.

Playing with Fire UK

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Re: How to invest after maxing out S&S ISA
« Reply #12 on: October 19, 2017, 09:28:09 AM »
I have had a read up on some Monevator articles and things are becoming more clear. But a £11k+ gain only needs reporting when this gain has been realised? So this potentially gives me many more years where I can be creative and move the money around as is necessary, and over time the ISA can build.   

Yes, a £11k gain outside an ISA doesn't trigger any CGT unless you sell. If you were thinking of a property purchase, or other major expense, you might've had to deal with balancing the gains or pulling out of the ISAs.

I agree that the VLS is very UK-heavy!

cerat0n1a

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Re: How to invest after maxing out S&S ISA
« Reply #13 on: October 19, 2017, 09:29:20 AM »
But a £11k+ gain only needs reporting when this gain has been realised? So this potentially gives me many more years where I can be creative and move the money around as is necessary, and over time the ISA can build.   

In general, yes (to be 100% accurate, if you sell assets worth more than four times the CGT allowance, you have to report it anyway, it's just that you don't pay any tax if the resulting profit is below the allowance. )

If you are investing in funds, you typically have good control over when and how much you sell and can sell enough each year to use up your CGT allowance and other tricks that others have alluded to. So payment of CGT can be reduced/eliminated and the timing is up to you.

With individual shares however, there is always the risk of a takeover or other corporate event making you (in effect) a forced seller. I've had to pay CGT this year as a result of that, when use of an ISA would have avoided it.