What caught my eye this week.
Recent weeks have seen us debate whether you should sell ahead of – what’s still only rumoured – capital gains tax rises.
But as St. Charlie liked to remind us: invert, always invert!
To wit: tax-motivated sellers might create opportunities for bargain-hunting buyers.
Of course every tax-fearing seller must already be finding a buyer for their shares, investment trusts, or buy-to-let property.
Because no buyer, no sale.
But that eternal truth doesn’t mean that sudden – and hurried – selling can’t overwhelm natural demand, pushing prices below where they’d be if Rachel Reeves had instead decided to take the rest of 2024 off.
Bricking it
So are we seeing any signs of frantic or panic selling so far?
Maybe the very faintest signs – especially if you want to see it, I suppose.
Property is where there’s the strongest signal of tax-motivated selling going on.
Just this week Rightmove reported a surge in larger homes for sale that’s supposedly driven by CGT fears.
As reported by The Guardian:
Rightmove said various factors could be causing the increase in owners of larger homes wanting to sell. One was falling mortgage rates following the Bank of England’s 1 August interest rate cut, and the expectation of more to come.
“Another factor is increasing speculation around a CGT rise,” the website said. “In addition to landlords, second homeowners of larger homes, in particular, could be hit by any increase to CGT, which may be leading some to cash out now.”
Last week I linked to reports that some landlords in London are selling up for the same reasons.
Buy-to-let hasn’t been attractive in London for years. It’s easy to imagine the prospect of a CGT hike as the final straw to prompt some sales.
After all, you can’t defuse capital gains built up on a two-bedroom flat in Clapham piecemeal like you can with shares. Tenants tend to get cross if you try to partition and flog off their second bedroom.
Final straw men
Veteran landlords in the South East could well be sitting on hundreds of thousands of pounds worth of gains per BTL.
And I imagine some framing their choice as sell now and buy an annuity (or similar) and escape a 40% hit – or else hold the properties ‘forever’ as a pension.
Because people really really hate paying capital gains tax.
Nevertheless property is property – big, lumpy, illiquid. It can be quicker to sell the idea of university to your school-hating 13-year old than to get a terraced house off your hands and the money in the bank.
I’ve read articles suggesting workarounds, enabling speedy sales agreed ahead of the Budget to complete afterwards. But I don’t know whether these strategies are credible – or even strictly legal.
What I am happy stating though is that if I was a first-time buyer (or even a still-keen landlord) looking to buy, this would all be music to my ears.
There must be some decent deals out there for those who can move quickly.
Au revoir, mon chéri
How about shares? Are we seeing any downward pressure that we can pin on Budget Day worries?
Well…maybe.
Broker Winterflood reported this week that already-wide discounts on investment trusts have gotten a bit wider. Only by 20 basis points to 14.2% as of Thursday.
Which is vaguely… suggestive, I suppose.
Sources in the CityWire article citing this discount widening mooted a ‘buyer’s strike’ was to blame. Budget Day-minded, yes, but more ‘wait and see’ than ‘get me out of here’.
Also markets have been more choppy recently. So it might be fanciful to see CGT motivations at work.
On the other hand, a bit like BTLs, investment trusts are quintessentially held by greybeards who tended to get into them back before passive investing became popular. Folks like HariSeldon from our recent FIRE-side chat.
And the richer ones may well have sizeable holdings outside of tax shelters. Especially if they didn’t read Monevator, and so didn’t do all they could to defuse their gains and shelter their assets over the years.
Might they be selling at the margin?
I guess. Though they’d need to be pretty long-term owners to have big capital gains, given most trusts have been through the ringer for the past couple of years.
And surely long-term owners are more likely to stay that way? They’ve sat through plenty of scares before.
Baby steps
As for small caps, I think I’ve noticed odd moves downwards in some small caps I follow.
But I could be fooling myself. These little shares bounce around all the time, as their market is so thin.
True, there has been weakness in the AIM 100 index, coinciding with the CGT drumbeat getting louder:
Source: Hargreaves Lansdown
Which is again… a bit suggestive. The FTSE 100 and the US markets are higher over the same timeframe.
But the AIM index does include plenty of companies that the Budget might also make ineligible for business relief – useful for inheritance tax planning – if other rumours turn out to be true.
Also the (non-AIM) FTSE Small Cap index has been more resilient. Which doesn’t suggest private investors are rushing for the exit.
A big leap
What would it look like if UK private investors were dumping stocks for CGT-mitigating reasons, rather than because of the underlying fundamentals?
Well, I’d expect to see steady selling ahead of Budget Day on 30 October.
That would drive some underperformance by UK equities, mostly at the smaller end of the market.
Then after the budget we could expect a bounce, irrespective of if or how CGT levels are changed. (Because it will probably be too late to sell by then to avoid any announced hike.)
And markets being markets, presumably that bounce will be somewhat front run…
Okay, this is getting speculative!
As a naughty active investor, I have the dream of mis-pricing due to sellers wanting rid for their own reasons filed next to childhood memories of sloppy ice-creams eaten on sunny beaches.
Heaven!
At least in theory – before you learn about heart disease, diabetes, skin cancer, and how hard it is to beat the market.
It’s not something the average Monevator reader needs to ponder, anyway.
Unless just maybe you’ve inherited a few hundred thousand pounds, and you’re in the market for your first two-bedroom ex-BTL flat?
In which case, good luck and don’t make an offer until you see the whites of their eyes!
Have a great weekend.
p.s. Nearly a fifth of you said you were selling for CGT-related reasons in our recent poll, so we know it’s happening. But has anyone spotted any buying opportunities as a result? Whether shares, bonds, or bricks and mortar – please let us know in the comments below.
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News
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HMRC drops ban on fractional shares in an ISA – Which
First-time buyers have two months left to save £15,000 in stamp duty – Your Money
Tesco loses Supreme Court ‘fire and rehire’ case – Sky
Vodafone-Three merger: tens of millions could face higher bills, says UK watchdog – Guardian
Second rate cut by ECB as euro area growth falters – Sky
Barclays report claims 13m UK adults sitting on £430bn of investable cash – Money Marketing
Families with twins face an additional £20,000 hit – Twins Trust
China mulls raising retirement age as workforce ages – Semafor
Long NHS delays in England leading to thousands of deaths, inquiry finds – Guardian
Products and services
Nationwide, Natwest, and TSB slash mortgage rates for smaller deposits – This Is Money
Pension Wise launches digital guidance service – Which
Dangers for FOMO mortgage hunters as rates fall – BBC
Open an account with low-cost platform InvestEngine via our link and get up to £50 when you invest at least £100 (T&Cs apply. Capital at risk) – InvestEngine
Vanguard launches long-awaited app for UK investors – Your Money
Insurance rates still too high for pay-monthly customers – Which
Get £100-£2,000 cashback when you open a SIPP with Interactive Investor (T&Cs apply. Capital at risk) – Interactive Investor
Is investing in rum a sober choice? [Search result] – FT
Vinted will alert you if you breach HMRC’s new selling rules – Skint Dad
Nationwide and Santander change-up their current account fees – Which
Homes for sale with stylish extensions, in pictures – Guardian
Comment and opinion
Investors must survive – Behavioural Investment
Britain’s new Sovereign Wealth Fund: what can it learn from others? – FT
If the prices are wrong you should be rich – A Wealth of Common Sense
Give bonds some credit – Humble Dollar
Spend money according to your plans – Darius Foroux
Can your children really help you cut your tax bill? – This Is Money
Top 10 savings hacks – Be Clever With Your Cash
Mark Dampier’s side of the Woodford/Hargreaves story – Money Marketing
International diversification…diversifies! – Verdad
Compound interest is apolitical – Tony Isola
Trusting the wrong people – Abnormal Returns
The minimum amount of money where work becomes optional – Financial Samurai
The ETF market: in zine form – Dave Nadig
Cliff Asness: the less-efficient market hypothesis [Research] – SSRN
Naughty corner: Active antics
Alphabet has never been this (relatively) cheap versus the S&P 500 – Sherwood
An angel investor’s ‘resignation letter’ – Reaction Wheel
China’s mysterious deflation – Scott Sumner
Price predictions mini-special
Should you ignore past stock market returns? – Morningstar
The case for trend following – Optimal Momentum
Kindle book bargains
Quit: The Power of Knowing When to Walk Away by Annie Duke – £0.99 on Kindle
The Good Enough Job by Simon Stolzoff – £0.99 on Kindle
Grit: The Power of Passion and Perseverance by Angela Duckworth – £0.99 on Kindle
The Missing Cryptoqueen by Jamie Bartlett – £0.99 on Kindle
Environmental factors
Low-carbon homes can save £1,341 a year in bills, study shows – Guardian
What China’s EV revolution looks like on the ground… – Big Technology
…and what it might mean for the UK car market – This Is Money
Solar panel installation slump in UK blamed on the cold summer – This Is Money
UK watchdog gives funds anti-greenwashing rule extension – Reuters
Robot overlord roundup
AI and the technological Richter scale – Zvi Mowshowitz
OpenAI reportedly in talks to raise at $150bn valuation – TechCrunch
How to navigate a tech world dominated by AI – Uncharted Territories
Here’s what AI does next – The Honest Broker
The end of work – Daniel Miessler [h/t Abnormal Returns]
Right-wing influencer shills mini-special
Stop letting right-wing influencers cosplay as ‘independent media’ – Taylor Lorenz
Mysterious influencer network pushed sexual smears of Kamala Harris – Semafor
Off our beat
How a mind-boggling device changed economic history [Search result] – FT
Inside Thailand’s $2 billion scam industry – Newsweek
Boomer Apple – Stratechery
The mysterious, meteoric rise of Shein – The Atlantic via MSN
The great global divergence of values – Garden of Forking Paths
Six ideas to keep Poland’s economic miracle going – Noahpinion
How long til we’re all on Ozempic? – Asterix
It’s another British multimillionaire’s solemn farewell tour – Marina Hyde
And finally…
“Everything, in retrospect, is obvious. But if everything were obvious, authors of histories of financial folly would be rich.”
– Michael Lewis, Panic!: The Story of Modern Financial Insanity
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Thanks, @TI – always appreciated when this arrives early!
The Cliff Asness, AQR 30/08/24 SSRN paper debunking the EMH is making waves. As well as Ben Carlson referencing Cliff’s views in the AWOCs link, the ‘Gold crowd’ are onto it too (see about halfway in on this from Bonner Private Research, which is always worth a read by the way, even when one disagrees with its PoV):
https://open.substack.com/pub/bonnerprivateresearch/p/the-gates-of-vienna
There’s much talk of an impending wealth tax, but Capital Gains Tax pretty much is a wealth tax already. Especially when it’s not inflation-linked in inflationary times and with an ever-shrinking allowance, now £3k.
As with most wealth taxes though, what is mainly does is push people into going elsewhere: it strongly incentivises those with savings to not invest them in a GIA. Start by filling ISAs, SIPPs, JISAs etc then look at VCTs and EIS and then maybe even classic cars or whatever else. Or only put tax-efficient bonds like Gilts and Linkers in the GIA and the risk assets in the ISAs, SIPPs etc. With bonds at these yields 60:40 makes more sense, especially if you can run the 40 tax free.
As Dan Neidle says, there’s a reason no other country runs extra wealth taxes or much higher CGT than we have already. Every chance higher CGT could actually reduce the tax take, his piece on the Lib Dems manifesto which reinstates inflation-linking suggested a £3bn loss.
https://taxpolicy.org.uk/2024/08/01/rachel-reeves-raise-22bn-of-tax/
https://taxpolicy.org.uk/2024/06/10/2024-election-lib-dem-manifesto/#cgt
Other things being equal, sellers motivated only by tax will want to buy straight back in, ringing just enough change to dodge the bed and breakfast rules. So I sell my vwrl and buy your msci and vice versa. Net standstill.
Re Investment Trust discounts, I see 4 factors which have hammered them:
1. Higher interest rates, especially higher tax free rates (Gilts).
2. Wealth managers getting ever larger with mergers, so needing ever larger/more liquid holdings.
3. The amount UK investors invest in their home markets is now off the scale low. Governments on both sides seem untroubled by this and by our capital markets atrophying by the day (despite apparently understanding that the only way out of our stagnation is ‘growth’, which would ideally be growth in the well-paid and so well-taxed jobs e.g. in and around the City).
4. The mood music on CGT being one way for years now.
Only the first of those looks likely to change any day soon? On the back of that you can make a case for some big, yield sensitive trusts in an ISA/SIPP, particularly if the government is likely to be supportive. So e.g. 3IN – huge, liquid, yield sensitive, government is likely to want this kind of capital to help their projects etc.
But for the smaller trusts? I think you need more of a tailwind than they’re going to get when the Budget “isn’t quite as bad as feared” (rinse and repeat). That fear will be ongoing for this parliament at least, there’s no way CGT is going to get ‘better’. Would you ever open a new GIA position in a niche investment trust? Even the guys who know what they’re doing (Nick Greenwood etc) are going nowhere. & if you’re ever right you’ll get hammered by a likely worse than now CGT. No thanks!
Will the government do something about capital markets before they wither away (e.g. new ISA money has to be in UK listed capital markets, pension pots have to run Australian type levels of allocation to their home economy or whatever)? To me if you look at it on a ‘future prosperity of our country’ level I think they should, even if that potentially means lower investment returns. As Merryn SW etc say, if the government is giving you the tax incentive then they can put a few conditions on it, like other countries do. Especially if they’re conditions are long-term supportive of a huge number of high paying jobs.
In the meantime, good luck with small investment trusts. I think you’ll need it alas..
[Had been going to post at Moguls’ “What cheap investment trusts should I buy next?” piece, but perhaps this resonates more with @Vroom’s comment above]
@TI: could you possibly please consider covering in Moguls over the next 12-18 months pieces dealing with your views on the current opportunities and risks specifically in each of the following (?):
1. General infrastructure ITs outside of the sector behemoth 3IN.
2. Renewable energy ITs (sector seems to have a host of practical complications, but some reported trailing yields are maybe tempting, e.g. Gore Street Energy Storage on 13%)
3. REITs, i.e those in warehousing, supermarkets, commercial property (offices), healthcare (care homes) and residential (including student and social housing).
4. The venerable and wide ranging UK equity income sector.
@Vroom: agree with all your points 1-4 (and your third paragraph for the smaller and specialist ITs) on the reasons for both the persistence and magnitude of IT discounts and for (esp. recent) IT performance issues.
Only thing which I’d add is the IMO increasing importance of the ongoing, possibly accelerating, switch over to passive, especially ETF based index trackers.
As one writer put it recently “The investor brain, already badly positioned to deal with the issues at hand, is now over-loaded with mountains of data, which taken individually are mostly of little or no value, and taken as a whole put a bomb under the investors ability to make a coherent decision”.
In those circumstances, investors are understandably (probably sensibly) choosing to go passive by ‘default’, supported by the long running (but esp. pronounced recent) continued relative underperformance of ITs versus indexing.
@Delta, I think investors are increasingly switching to passive market trackers for a variety of reasons. Decades of research shows that investors are likely to get better returns investing in a market tracker compared to actively managed funds. That message is getting through partly because it is increasingly hard to deny reality and partly because financial advisors, etc. no longer get trail commission from pushing active funds. Giving the overwhelming evidence and requirement to act in the best interests of their clients, what else is a financial advisor to do?
@Naeclue: very true. I think passive’s an unstoppable juggernaut at this point onwards.
Passive investing / indexing always had an edge because of both the return skew profile of equities (re: Bessembinder) and costs. Now in addition to those foundational advantages market inelasticity / fund flow reinforcement adds to those advantages (and at a possibly increasing rate).
It’s a brave advisor now who’d suggest an active fund.
Personally, I was originally a little over 85% trackers, but as they’ve outperformed my active picks, and as I continued to favour trackers when adding new money, the passive share has drifted up into the 90% to 95% region.
Having said that, whilst the closed end fund sector might perhaps be structurally impaired, there’s a lot of tempting discounts and yields out there in UK IT land 😉 (not so much to be attracted to though in the active OEIC space IMO; but maybe something novel like the Nutshell Growth fund might possibly be worth looking into for the more adventurous investor).
Not all index funds are market trackers of course. There are now plenty of options available to satisfy one’s speculatory itches that does not require expensive active funds. I am mostly in market trackers, but do have small cap ETFs, a US listed low volatility ETF and US REITs ETF.
I would have been better off had I stuck with the cap weighted market trackers, particularly so with the REITs ETF, but I am hanging in there just in case!
Does the HMRC tax capital gains on realestate owned by foreigners to? If not it might be an intersting time to buy for friends on the other side of the Channel
@Ton, CGT is charged even on foreign ownership of UK land and property (but not on UK shares). It cannot be avoided by selling a company that owns the land or property either.
Also, about Investment Trusts, why buy a vehicle which wants 0.5% stamp duty when unit trusts and ETFs don’t?
Quick thank you for link this week @TI to Gary Antonacci’s Optimal Momentum site. It’s an excellent resource. If I may I just give a shout out to the Dual Momentum Systems (“DMS”) site which takes Gary’s model and tries to tweak / improve it in a sympathetic and thoughtful way.
As the battle has now been “lost” between active (investment trusts et) investing and passive perhaps it is time that financial advisors moved to other areas that are arguably of more serious importance to amateur investors
Choosing an investors Asset Allocation for instance -probably an investors most important financial decision ,use of tax free investment wrappers-ISAs and SIPPs ,estate planning etc
Combing this “change of tack” with a move to an hourly charging rate for financial advice that is realistic,actually beneficial to the investor and easily measurable would possibly result in a satisfactory outcome for both parties
xxd09
While it is always difficult to compare different tax systems, https://taxfoundation.org/data/all/eu/capital-gains-tax-rates-in-europe-2024/ has an interesting comparison of CGT across Europe.
Assuming the comparisons are fair, then the UK has the 14th highest CGT rate in Europe. Our nearest neighbours (Ireland and France) both have rates over 30%. Of course, some countries (e.g., Belgium and Switzerland) have 0% rates (I wonder why this was never harmonised across the EU like VAT). In other words, there is some room for an increase without scaring the horses too much.
Personally, I would like to see lower rates on capital gains resulting from entrepreneurial activities (i.e., similar to business asset disposal relief) and more on other areas (i.e., multiple house ownership and share ownership).
It has to be said, that not many people will earn enough to exceed their tax sheltered allowances (ISA and pension) on a regular basis and, therefore, outside of BTL only a small fraction of the population have to worry about CGT.
This is a really great listen on AI and semiconductor industry – where the limits might actually be:
https://joincolossus.com/episode/baker-ai-semiconductors-and-the-robotic-frontier/
I would agree with @Vroom, it’s not clear that raising CGT will raise net revenues. Other than an initial bump in revenues caused by people trying to crystallize gains before a higher rate may be introduced. People take countermeasures. Many will simply decide not to liquidate or leave the UK.
CGT has been altered many times since it was introduced in 1965. Initially, short-terms gains (<12m) were taxed as income and long-term gains at 30%. In 1982 and then, again in 1988, forms of indexation relief was added. In 1998, taper relief replaced indexation. In 2008, we went back to a flat rate. Some rates were tweaked higher in 2010, lower in 2016. Arguably, there is a track record for waiting it out until more favourable rates are offered.
Personally, I was thinking about this in terms of my offshore life bond policies. My biggest, multi-bagger, type gains are in those. Right now, using top slicing relief I can reduce the marginal rate I pay on those gains to around 20%, rather than the current 45%. If the govt changed the rules on that, what would be my response? Well, it wouldn’t be to sell and pay 45%! It would be to leave the country, then take the gains once residency had been lost. The govt will get 20% of everything or 45% of nothing.
A business event I went to recently had an angel investor speaker who said she thought an unintend consequence of any movement in cgt would be to increase the popularity of vct/eis investments because of the favourable tax treatment which may actually boost investment in this area. I dont know anything about this area so just posting it for commentary from more learned readers as to whether this is logical or not
@Fatbritabroad: definitely. The issue would be that there’s only so much funding capacity – i..e. either a) too much new money going into VCT, EIS and SEIS for the opportunity set or b). the fund manager pulls up the draw bridge when their target is reached.
Taking VCT as an example, VCTs issued shares to the value of £1,122 mn in 2021 to 2022, which is 68% higher in comparison to the 2020. £1.1 billion p.a. is mere peanuts though compared to flows into SIPPs (and ISAs).
If tax relief is restricted to 20% for SIPPs (and other pensions) – leading to taxpayers turning from SIPPs to VCT, EIS and SEIS – then they’ll either be flooded with capital and, consequently, deliver sub par returns, or many people will find that their chosen VCT etc is closed to new funds.
@ZXSpectrum48k, “Right now, using top slicing relief I can reduce the marginal rate I pay on those gains to around 20%, rather than the current 45%.”
That’s not right. If your marginal rate is 45% and you have a gain from an offshore bond, you will pay income tax on the gain at 45%. You will get no top slicing relief.
@B. Lackdown “Investment Trusts why buy …..”
I hold a personally chosen fully ISA’d portfolio of ITs, specifically for income, which is currently yielding a tax free 5%. For me they are the thinking man’s annuity.
The capital value is of secondary importance to me, but FWIW the valuation of the portfolio is currently book cost plus 12.83%.
Since my curiosity was piqued (after saying earlier that I thought not many people would have to deal with CGT), I looked up how many people paid CGT in the UK.
According to HMRC, about 370000 in tax year 2022-2023, representing about 1% of all income taxpayers (~37 million). 134000 of these were property disposals (i.e. about one third). The total amount brought in was £14.4 billion on 80.6 billion of gains (i.e., a headline rate of 17.9%). Roughly 40% of total CGT was brought in by just 1% of those who paid CGT (i.e.,~ 0.01% of tax payers) each of whom realised gains of over £5 million.
The tax treatment of offshore insurance bonds illustrates some of the absurd inconsistencies in our tax system.
Gains on offshore bonds are taxed as income, irrespective of the mix between capital gains and income of the underlying investments. With gains on other investments, income and capital gains are taxed at different rates.
Capital gains are taxed at lower rates than income, in an attempt to compensate for inflation. There is no reduction in tax on gains on offshore bonds due to inflation.
If gains on an offshore bond push someone into a higher tax band and/or cause the loss of tax allowances, “Top slicing relief” is given in recognition of gains accruing over more than 1 year. On other investments top slicing relief is not available on capital gains, even when the gain accrues over many years.
Income produced by investments is taxed in the year it is received, even if not paid out (eg with accumulating ETFs). With investments inside an offshore bond, the income is taxed in the year it is withdrawn.
Madness.
I have heard reports that the CGT relief given on death may be dropped. All very well and likely to bring in more tax (at least in the short term), but a potential nightmare for personal representatives. Even if you can find original purchase prices of everything it could still be a total pain, eg calculating the gain/loss on shares purchased and sold on multiple occasions that have undergone share splits and other corporate actions.
I really hope they don’t bring that in.
@Alan S, yes the scope of CGT is not very wide, but there are a number of reasons for that. CGT is not payable on death, as I mentioned above. Losses, even from previous years, can be used to offset gains. We used to have a fairly generous CGT allowance. Even now it is £3k compared to only £1k or less for the equivalent interest allowance. Then there are tricks, such as passing an asset to a spouse so that his/her allowance can be used and/or a lower tax rate achieved. Or just holding on to something indefinitely instead of crystallising the gain.
Also capital gains considered part of a trade can get taxed as income.
ps, forgot to mention, capital gains arising within a company are subject to corporation tax, not CGT.
I will get top slicing relief. If I’ve held the bond for 20 years, I get to spread the liability over 20 years. It doesn’t matter if it’s an onshore or offshore bond (except onshore will have already paid a 20% tax rate). techzone.abrdn.com/public/investments/top-slicing-relief.
@Naeclue (#24 and #25). I suspect at death, IHT is the alternative to CGT since it is based on the current value of assets (rather than their past history). However, you could make an argument for levying both – death crystallises the untaxed gains made by the original holder, and IHT then represents a tax on the newly acquired assets of the inheritor. However, as you say, administratively assessing CGT might be a nightmare if records were not well kept.
@ZXSpectrum48k, you will only get top slicing relief if you pay tax at the basic or higher rate and are pushed into additional rate tax as a consequence of the chargeable event. If you are already an additional rate taxpayer you will not get top slicing relief. Don’t take my word for it, work through a sample calculation before you make an expensive mistake.
To win at the top slicing game you need your income from sources other than the chargeable event to be as low as possible, preferably zero. This is the appeal – no tax to pay rolling up, when someone has high earnings, then draw at lower tax rates when earnings are lower.
On the battle being lost between active and passive…
Any views on active ETFs?
It is the fastest growing segment within the ETF market.
https://www.ft.com/content/2674786a-1673-4cb9-9a1f-05e710a5fa57
JPMorgan’s ‘research enhanced index’ Global and US funds are the largest, both launched in 2018, both cheap and index beating.
https://am.jpmorgan.com/gb/en/asset-management/adv/products/jpm-global-research-enhanced-index-equity-esg-ucits-etf-usd-acc-ie00bf4g6y48#/overview
JREG (global equities) 0.25% TER, beaten the MSCI World net of fees every year since inception.
JREU (US equities) 0.20% TER, beaten the S&P 500 5/6 years.
Somewhat of a hybrid between active and passive. Differs from smart beta in that the active decisions are human decisions taken by analysts and PMs rather than being rules based.
I’m somewhat intrigued by the consistency of the outperformance. Repeatable indefinitely I don’t know but 6 years on the trot seems statistically significant
Who said we’d all be additional rate taxpayers? The whole family has segments on the life policy. We can reassign segments trivially. Encash segments in differing amounts at different times. So my kids, say at uni by then, can cash in £250k of units, get 20 years top-slicing relief, and essentially pay basic rate tax. Keep doing that every year. The wife can do the same. Possibly I can, assuming I don’t have much in taxable income at that point. Really it’s only two rented houses and depos that generate income. The vast bulk beyond that is sheltered.
I’m not planning on taking any of this while I’m working. Why would I need to? The issue for me is that they get rid of top-slicing relief. It’s a bonkers loophole that I’ve never quite understood has escaped elimination. As I said, if they do I will need to go abroad.
I’ve had the experts take a look. They agree with the calcs. There is nothing complicated in those. This is exactly what the bond was setup to do fifteen years ago. Why it was structured that way.
@TI partly O/T – possible link for the coming w/e or perhaps even a full MV item for your take on this.
It seems to me that it’s effectively a halfway house type of annuity, and so to that extent the criticism is misguided. A “loss” on resale should be the expectation.
https://www.thisismoney.co.uk/money/news/article-10182583/The-retirement-home-scandal-wiping-life-savings.html
@ZXSpectrum48k, it would have helped if you had said that earlier. your precise words were:
“Right now, using top slicing relief I can reduce the marginal rate I pay on those gains to around 20%, rather than the current 45%.”
I thought from this that when you said right now that you meant right now and that right now you pay tax at additional rate.
Incidentally, a 250k chargeable event on a 20 year bond, with no other income, will indeed have substantial tax slicing relief. But the same trick cannot be done the following year with another 250k “unit”. It just doesn’t work that way as you can only go back to the previous chargeable event. The number of years in the top slicing relief calculation would be 1 and there will be no tax slicing relief. IOW you cannot “Keep doing that every year” and you should have words with any experts who told you that you can.
I am just trying to be helpful here.
Ps yes you can assign a bond, or segments, to any adult and will not be charged CGT, unlike with other assets. This is quite a perk.
@AoI #30: sure do. Thematic and 99% (but crucially not 100%) of Active ETFs are pure junk territory. They exist for 3 reasons:
– Exit liquidity for founders, seed round and other early investors.
– OEIC (wolf’s) active management fund fees wrapped up in ETF (sheep’s) clothing.
– Showing the ETF houses (BlackRock etc) are down with the kids by having a ready baked something to satisfy the latest fad.
Having said that, there is a 100 to 1 noise to signal ratio, so whilst it’s a case of looking for gold dust amongst rocks there are – as you’ve identified above – a relative few active or hybrid active ETFs that are perhaps worth looking at. In other words, one can’t write off the whole ‘sector’ only by virtue of it being 99% c***, because there’s always that last 1% which is possibly worth looking at in more detail.
Over here on the LSE, the WTEF ETF from WisdomTree’s stable of offerings might be one such.
State side the Resolve Asset Management Return Stacked and other WisdomTree capital efficient ETFs might also be worth a look.
Also the SPMO ETF (Invesco S&P 500 Momentum US ETF) and the HMCT ETF (Direxion HCM Tactical Enhanced US ETF) look potentially intriguing if they ever become available over here in blighty.
@Naeclue. True now but not when my bonds were established. Offshore bonds established on or after 6 April 2013 will have the top slicing period shortened to the number of full years between the current chargeable event and the previous one. Offshore bonds established prior to 6 April 2013 will have a top slicing period dating back to the inception of the bond. My bonds were established a number of years prior. The custodian has had this confirmed from HMRC.
I don’t want to argue about offshore bonds. They have strengths and weaknesses. They cost (I pay 23bp of NAV) and they have limitations (i.e. you cannot trade single stocks or bonds with violating rules). Yet they also offer forms of flexibility that ISAs and SIPPs do not. They can do derivatives (for hedging) and hold funds that ISAs cannot (due to reporting status or say being US domicile). It’s just another gross-roll up wrapper.
My point was that, given my wife and children are dual passport, further hikes in taxation will continue to undermine any lingering need to remain in the UK. Everyone else might be happy to fund the public sector to infinity and beyond but I don’t think that is actually sustainable.
@ZX #35: “Everyone else might be happy to fund the public sector to infinity and beyond but I don’t think that is actually sustainable”: is it really just a binary of lower taxes or better services, a la 55 Tufton Street reasoning?
From 1950 through to Anthony Barber’s boom and bust in 1972/73 things were going pretty well all told. Not without problems but I’d swap the prospects then for the sense of national doom now.
Why not instead spend to invest in genuinely productive assets that enhance the national balance sheet, rather than on working age idleness and (with the greatest of respect to them) pensioners?
@ermine might call it utopian ( 😉 ) but it worked for a generation.
If we grow the pie then there will be enough for all mouths to feed from.
If we don’t though then I’ll be joining you in abandoning the sinking ship of the nation formerly known as Great Britain.
We might never be the next Singapore, but I don’t want to see us becoming an Argentina.
We seem to have just abandoned what worked before some time from 1976 (Callaghan’s IMF shock) onwards.
@ZXSpectrum48k, yes you are right about pre-2013 bonds. I had forgotten about that. Be careful with it though as it is a very valuable older policy. I seem to recall that there is more to it than this and it is possible to lose the status your investment bond has, then end up having to follow the post 2013 rules. Amendments, which might even include post 2013 segment assignment might cause problems.
I don’t understand how you manage to hold derivatives. That doesn’t sound like a permitted investment, unless they are within a fund/ACS? Here is a good summary of what’s allowed without falling into the PPB trap and losing top slicing relief.
https://www.rl360.com/row/news/new-hmrc-regulations-expand-assets-permissible-for-offshore-bonds.htm
Naeclue / ZX. Interesting conversation thanks.
If you want to avoid tax using an offshore bond, I’m not seeing why you couldn’t exit a country for tax residency purposes, live in a zero tax jurisdiction for a year, extract all of the money from the bond as income and then return the next.
Offshore bonds withdrawals are treated as income are they not so the 5 year Capital Gain restriction doesn’t apply in the UK.
I would think these will become increasingly interesting to people who can stash 7 figure sums. Any less and I’m not sure it’s worth it given the downsides (e.g. I believe ZX’s rate on the offshore bond is very competitive.)
The links this week were fantastic. I’d highly reccomend the one from the FT, such an incredible and inspirational story and I may just go check out the machine in the British museum this weekend.
@Seeking Fire, good try but no! Payments from an offshore life policy is treated as UK income, so you don’t escape the tax by being non-resident.
@OT — Cheers for your note, nice to see they’re appreciated.
(I must admit that if I didn’t compile Monevator’s Weekend Reading then I’d be it’s most loyal subscriber, but I suppose that’s to be expected 😉 )
@Seeking Fire, I thought I had better check my previous comment as I am a little rusty on this. It seems that you can avoid UK tax on an offshore bond if you stay non-resident for 5 years. So that would work for people intending to retire abroad.
@OT #39
You’ll be disappointed if you do visit the British Museum to see the machine – the article says the Science Museum.
@Naeclue. Thanks. Do you think an offshore bond would fall under an exit wealth tax?!
@SeekingFire. As Naeclue says it’s 5 years. This is one option we are considering given my better half has family abroad. Plus you can still fall foul of local taxation issues there. Every country you would want to live in wants a slice, it’s only the ones you don’t want to live in that don’t!
In terms of costs, I started with an initial 7 figure sum. We did a deal that involved a number of us all going to one provider and offering them a collective 8 figure sum. So that gave us bargaining power. We also negotiated a sliding fee as NAV went up. Essentially, they send me a useless quarterly NAV report, do perhaps one or two transactions per year and get a question on taxation twice a decade, all for 23bp, so I’m not losing any sleep over working them too hard.
ZX / Naeclue – Thanks both for responses. 23pb for an offshore bond looks very competitive relative wise. They are an obvious wrapper for very high earners particularly those looking to retire outside the UK. For everyone else – it’s probably not worth it but could increasingly be if other options becomes more punitive.
@Seeking Fire, offshore investment bonds can work well if the intention is to retire abroad, but best to checkout how these types of investments are taxed in the country you want to retire into. An alternative, if your chosen country does not tax capital gains, is to invest in assets that have a low income yield, such as US shares. You will have to suffer tax on the income, but don’t do disposals until after you emigrate.
An exit wealth tax could be very disruptive for those aiming to retire abroad and I would have thought offshore and onshore investment bonds would be in scope. We don’t have any exit taxes as present, but there are countries that do. Australia for example charges CGT on unrealised gains when people become non-resident, at full income tax rates!
I am reconsidering my stance on not crystallising some capital gains ahead of the budget. If we did, and put the money into low coupon gilts, that would reduce our income from dividends, for which the tax may rise and allow us to keep adding to ISAs for a few more years. It has become very hard to run down our GIA investments, which is what we would like to do, without paying CGT. A combination of the lower CGT allowance and running out of investments with low gains.
@Naeclue:
Re: “I am reconsidering ….”
This seems quite a change from your comment only a couple of weeks ago: https://monevator.com/are-you-selling-ahead-of-a-capital-gains-tax-rise/#comment-1831813
Has some new realisation/information come to light?
I recognise your proposed strategy, but is there not a risk that some of the following may just happen:
a) no continuing availability/future supply of [presumably short dated] low-coupon gilts;
b) gilts lose their CGT exemption;
c) ISA rules change;
d) market may take a tumble
Tricky.
@Al Cam, not a realisation or information, just the thought that I had better consider what might come from the budget and its impact on our decumulation plan. A rise in CGT now seems highly likely and maybe a rise in the income tax on dividends. Aligning dividend tax rates with standard 20%/40%/45% income tax rates is not unlikely as a number of Labour commentators have mentioned that all income should be taxed the same.
Other tax changes, such as caps on ISAs, replacement of the pension LTA charge with something else may also be inthe pipeline. From what other MPs have said it sounds as though a wealth tax is off the table, for now.
Having considered all of this I am now back on track and propose to do nothing in advance of the budget! Should they require CGT to be paid on donations of shares to charity then we would need a rethink, otherwise increasing the rates of CGT should not matter. I think any attempt at curbing tax relief on charitable donations would get called Labour’s Charity Tax, so hopefully they will not go there.
Gilts losing CGT exemption would be a problem, but if they did that it would also bring capital losses on gilts into CGT, which is probably not something they would want, and would deter gilt investors. Definitely not what they want.
I was listening to George Osbourne on the CGT topic at a conference today, one small but quite interesting insight was that the Treasury’s internal modelling comes out with 32% as the CGT rate beyond which they think revenue declines.
In that context, it’s hard to argue pushing it to 40%/45% in the full belief it would reduce public revenue would be anything but a destructive triumph of ideology over pragmatism. Will be interesting to see what they do.
@Naeclue (#49):
Thanks for your reply.
I agree gilts losing CGT exemption would probably deter gilt investors.
Are most fee-paying schools not registered charities?
Time will tell.
I trust you may also have noted AoI’s input at #50 – as a possible source of the info [re 32%] you were looking for in that same post a couple of weeks back.
@Al Cam, for CGT my thinking is that it will go up to 15%/30%, or maybe 20%/30%.
@Naeclue:
FWIW, I reckon ISA subscription could be cut from end of October. Thus, I have pulled forward the transactions I usually do towards the end of the tax year (to fill that tax years ISA) so that they complete before the end of October. But I am doing nothing else. Whilst there is some risk in doing this, and I may live to regret it – I reckon on balance it is just about prudent. In any case it is now too late to change course.