The Lemon Fool

My understanding is that most people here are LTBH advocates, as am I.

However over the last few years I have been thinking about the implications of this on capital gains tax liabilities and have instigated a policy of selling out of enough positions to make full use of my annual allowance, buying back in once enough time has elapsed.

So far I have been fortunate in being able to buy back in at a lower price on average. This does mean making some some timing decisions which of course is not strictly HYP.

Does anyone else do this or have an opinion?

I've been doing that (selling sufficient positions to fully utilise my annual CGT allowance) since the mid-1990's. I'm fairly sure many here also do that. Perfectly normal and prudent behaviour because that annual allowance cannot be carried forward if unused.

I do not personally regard that as a perversion of a long-term buy and hold strategy. It does come with some frictional costs, of course, and you may get back in at a slightly worse price. But overall the tax savings over-ride that.

And if you annually subscribe to an ISA, you can do that as part of funding your ISA. You harvest tax-free gains while ensuring that those positions will never again attract tax.

Lootman wrote:...I do not personally regard that as a perversion of a long-term buy and hold strategy. It does come with some frictional costs, of course, and you may get back in at a slightly worse price. But overall the tax savings over-ride that.

And if you annually subscribe to an ISA, you can do that as part of funding your ISA. You harvest tax-free gains while ensuring that those positions will never again attract tax.

I've done it once or twice, but I don't make a point of using the GCT allowance before it's lost. There's always the risk that you use the full CGT allowance in funding your ISA at the beginning of the year, only to be hit by an unexpected corporate action later that gives rise to a CGT liability. It's a fine line you have to tread...

Breelander wrote:

Lootman wrote:And if you annually subscribe to an ISA, you can do that as part of funding your ISA. You harvest tax-free gains while ensuring that those positions will never again attract tax.

I've done it once or twice, but I don't make a point of using the GCT allowance before it's lost. There's always the risk that you use the full CGT allowance in funding your ISA at the beginning of the year, only to be hit by an unexpected corporate action later that gives rise to a CGT liability. It's a fine line you have to tread...

Do the sales to use up your CGT allowance at the end of the tax year; use the proceeds a few days later at the start of the next tax year to fund the ISA allowance for that tax year. You're out of the market for a few days (could be up to 5 if Easter hits the tax year boundary, or even 6 if e.g. a major royal gets married at the same time, but usually 1 or 3), but that's a lot better than 30. And you can pick which shares you sell to suit your end-of-tax-year CGT circumstances - possibly even loss-making ones if takeovers have been generous to you in that tax year.

Gengulphus

penteluk wrote:Does anyone else do this or have an opinion?

I'm with Lootman on this one.

I have been doing it as a matter of routine for 15 years now. For several reasons.

a) Releasing funds for the next year's ISA.
b) Reducing my potential tax liabiity, should I ever need to be a forced seller.
c) Realising profits/rebalancing if a share has risen substantially in price.

One may quibble about c) but IMO a) and b) are in no way in conflict with the HYP approach.

Delighted to see that Lootman is back after a long time.. I have benefited a lot from his comments and advice

I'm almost entirely long term buy & hold in my HYP portfolio but it has caused me problems over the last few years that have had me kicking myself about the years that I've wasted when I haven't made use of my CGT allowance to release some of the pressure in terms of locked in capital gains. The result has been that re-balancing by top-slicing certain shares (e.g. BATS) can now be quite tricky due to potential capital gains liabilities. I also had a situation a couple of years ago where I sold off some of my portfolio to buy a holiday apartment and that was a nightmare avoiding too much CGT but admittedly that's an unusual circumstance.

In the context of HYP where I have a chunk of capital deployed purely to generate income I find CGT incredibly hard to come to terms with, particularly on a takeover or a big return of capital that is accompanied by a roughly-corresponding reduction in dividend (e.g. the Vodafone/Verizon deal). In such cases I want to redeploy the capital released into replacement income-generating assets so that my income stream at least remains constant and any CGT liability causing some of that capital to leak away is something I always find deeply frustrating. I now try to use my CGT allowance each year.

- Julian

One thinks one will hold for ever, but then life happens and one needs to sell.
For us it was an unplanned house move.

If one has not used the allowance every year to suck profit out of the portfolio, one can get stuck with an awful lot of tax.
Alternatively, to avoid the tax one sells one's ISAs, which is what we opted to do, but the future tax benefit is lost. One cannot just recreate six-figure ISAs !

So I think it an elementary failure, not to use up one's allowance each year.

Thus far, I have done enough tinkering, and the OH's HYP is sufficiently unbalanced, that neither of us has had to agonise much over selling a share we wished to keep, but Gen's methodology seems a good one.

V8

I move shares each year with the highest capital gain from a unsheltered joint account to ISAs using the timing Gen suggests.

The downside as I see it is that on the death of one partner there will be a disruption to the combined income stream until probate is sorted.

Julian wrote:I'm almost entirely long term buy & hold in my HYP portfolio but it has caused me problems over the last few years that have had me kicking myself about the years that I've wasted when I haven't made use of my CGT allowance to release some of the pressure in terms of locked in capital gains. The result has been that re-balancing by top-slicing certain shares (e.g. BATS) can now be quite tricky due to potential capital gains liabilities.

I don't know your tax situation obviously but, at least if you are a basic rate taxpayer, and are struggling with this, you might take the view that a 10% CGT hit is about as good as it gets. With the latest reduction in rates, keeping within each year's annual allowance might not be such a pressing priority, and long-term you might save tax by selling while the rates are this low, as they might not always be.

If you are a basic-rate taxpayer, then be wary that extra gains can themselves push you into higher-rate tax. But to the extent that you can get away with 10%, it might be worth just sticking your finger down your throat and paying it.