Wrapper selection/tax considerations

Ralfos

Hi All

Just looking for a bit of a steer here on possible solutions:

Scenario.
£2m to invest for income - needs 120k pa

State Pension £8,000
GARS £28,000
Requires £84,000

As per Nathan Fryers article of July 2017 on this site, I'm looking at a combination of GIA and Offshore Bonds. Have also been playing around with Prudential tax wrapper tool. There is no income for pension conts and hes at or above LTA)

Other than trial and error (which Ive had a good stab at this afternoon) how else would people approach this?

Most favorable solution I've came up with (chanced upon?) so far is 600k GIA (withdrawing 2% - 12k) and 1.4m OSB (w/d 5% - 70k) which gives him 82k pa with very little tax.

I based this on the GIA generating 2% cap growth, 2% dividends and 1% income which looked like this:

600k GIA – Capital Growth - 2% £12,000 – CGTA = £300 @ 10% = £30 tax (v close to HRT threshold) )
Dividends - 2% £12,000 - £2,000(Div allowance) = £10k @ 7.5% = £750 tax
Interest - 1% £600 (below £1000 allowance so tax free?) = £0

Total Tax £780 x 20
£15,600

So, how would the forum approach this?

Thanks in advance all!

arongunningham

The GIA will produce income tax and CGT liabilities. For a higher-rate taxpayer that might mean less in a GIA - maybe just a float to fill ISAs?

£1.65m in a Bond with 5% withdrawals means no immediate tax. Problem solved?

Ralfos

Im hoping that 2% cap growth on 600k would just about match the CGT allowance each year. And yes, 20k per year would be switched into an ISA.

The adviser is keen to use the CGT allowance too. But yes, the lot in a Bond would be simpler!

arongunningham

But the GIA will produce income too (this is not going to fall in the CGT regime). Even if the income is reinvested or held in ACC funds, it's still income and tax may still need to be paid on it.

Ralfos

@arongunningham said:
But the GIA will produce income too (this is not going to fall in the CGT regime). Even if the income is reinvested or held in ACC funds, it's still income and tax may still need to be paid on it.

Hi - this was my calcs on income - am I correct:

Dividends - 2% £12,000 - £2,000(Div allowance) = £10k @ 7.5% = £750 tax
Interest - 1% £600 (below £1000 allowance so tax free?) = £0

thanks for your input

arongunningham

EDIT: Sorry I misread your message!

You've got it right....

However, 1% of £600k isn't £600

arongunningham

I'm not an ultra expert like some people here. But I think savings allowance will only be in relation to GIA cash accounts?

benjaminfabi

Hi,

Obviously I've no idea of the risk profile, age etc and I'm assuming GARS is a guaranteed pension of some kind and that it is inflation linked. That said:

I'd put less into the GIA.

You could put £300k into the GIA into dividend paying income units at, say, 4% net capital growth and 2% yield. This would generate about £12k pa of gains, broadly within the exemption for CGT. A 2% yield would give £5,700 pa net of a small amount of 7.5% income tax on the divs.

£20k into an ISA, into a fund that pays dividend income of 4%, this provides another £800. Bed and ISA each year to harvest the capital gains in the GIA.

He's now got £8k plus £28k plus £5.7k plus £0.8k equals £42,500.

Stick £100k in cash at 1% to use the personal savings allowance (and also gives a buffer for tax-paid surplus if needed). That's £43,500 and still within basic rate for a couple of thousand, so if growth or income from the GIA is higher than expected there's scope for basic rates of 10% or 7.5% respectively.

That leaves you needing £76,500 pa from £1.58m

Invest into an offshore bond, minimum 1,000 segments, and draw partially from all up to the 5%, which gives you up to £79,000 with no immediate liability to tax.

Total tax liability about £300.

I'd have to do more work on future ISA funding based on longevity. If it's more than 20 years I'd want to take small tax hits from segment encashments in the bond to avoid a potentially large liability. You need to keep the balance between short and long term tax consequences.

arongunningham

I would assume someone with £2m knocking about is already using his savings allowance, but you know what they say about assumptions...

Ralfos

@benjaminfabi said:
Hi,

Obviously I've no idea of the risk profile, age etc and I'm assuming GARS is a guaranteed pension of some kind and that it is inflation linked. That said:

I'd put less into the GIA.

You could put £300k into the GIA into dividend paying income units at, say, 4% net capital growth and 2% yield. This would generate about £12k pa of gains, broadly within the exemption for CGT. A 2% yield would give £5,700 pa net of a small amount of 7.5% income tax on the divs.

£20k into an ISA, into a fund that pays dividend income of 4%, this provides another £800. Bed and ISA each year to harvest the capital gains in the GIA.

He's now got £8k plus £28k plus £5.7k plus £0.8k equals £42,500.

Stick £100k in cash at 1% to use the personal savings allowance (and also gives a buffer for tax-paid surplus if needed). That's £43,500 and still within basic rate for a couple of thousand, so if growth or income from the GIA is higher than expected there's scope for basic rates of 10% or 7.5% respectively.

That leaves you needing £76,500 pa from £1.58m

Invest into an offshore bond, minimum 1,000 segments, and draw partially from all up to the 5%, which gives you up to £79,000 with no immediate liability to tax.

Total tax liability about £300.

I'd have to do more work on future ISA funding based on longevity. If it's more than 20 years I'd want to take small tax hits from segment encashments in the bond to avoid a potentially large liability. You need to keep the balance between short and long term tax consequences.

This looks great- let me digest and ocme back!

many thanks

Ralfos

@arongunningham said:
I would assume someone with £2m knocking about is already using his savings allowance, but you know what they say about assumptions...

Yes, youre right on both counts! Interest income will be much higher (*10) and he has another couple hundred in deposits/emergency funds which will be using his savings allowance.

Many thanks.....