Good reads from around the web.
I am soon going to sell shares in a private company I co-founded [1] a few years ago and later left. The company has been pretty successful, not least because of the drive and talent of the people at the top, who remain good friends.
I believe selling now makes sense for all concerned, but I do so with a few qualms. Unfortunately, one of those is that it will trigger a capital gains tax event [2].
The sale of my shareholding will generate a significant five-figure gain, far beyond the £10,600 annual CGT allowance. Despite having a 5% or greater shareholding, it seems I don’t qualify for entrepreneur’s relief as I haven’t been employed by the company within the last 12 months. This means I’m potentially on the hook for 18% at the basic rate of capital gains tax, or 28% if I breach the higher rate bracket.
Tax avoidance is perfectly legal [3], and needless to say I’m engaged in reducing my CGT liability [4]. For example, the market volatility since April has been kindly timed for me – whereas before April I was defusing capital gains [5] on various shareholdings, now I’m carefully selling losers to offset the far bigger gain that’s coming due. (More on this next week).
I’ll probably also reinvest more into my current business this year, rather than draw too much income out of it only for that to inflate my tax bill.
Taxing matters
Despite my disquiet about excessive public spendin [6]g, I’m not a survivalist nutter who believes the state should confine itself to pointing nukes at the Ruskies.
Everyone ought to pay their share of taxes, and I do.
I’m also aware that private equity firms and the like exploit the rules on capital gains tax to pay lower rates than their secretaries, despite often engaging more in City chinwags and financial chicanery than in real entrepreneurship.
But I have to say I am pretty miffed about the tax treatment of a private individual’s modest capital gains, whether on a company they started or on shares and the like.
The £10,600 allowance might seem a lot when you start investing, but once you’re into six figures (and you’ll need to be, eventually) it’s a joke. I’ve noticed that older investors are much keener on ISA-ing and SIPP-ing their stocks and shares than new investors are, and I’m sure this is why. Even I didn’t use tax-exempt wrappers until 2003, and I regularly regret it [7].
When I co-founded that business back in 2005, I put about one-fifth of my entire worldly wealth into it. More importantly, I gave up most of my other work, which slashed my income by more than 80%. We didn’t pay ourselves at all for a year, despite a six day week of 10-12 hours a day. When a salary did come, it began at less than I earned in my first (poorly-paid!) job out of university.
We took all the risk. We didn’t take a penny of State money, grants, or anything like it. Yet the State wants a share.
Fair enough, there is entrepreneur’s relief in some circumstances, but it doesn’t fit mine and I don’t particularly see why my own risk-taking should be penalised on technicalities.
And what about capital gains tax on everyday share investing?
Again, I am sympathetic to income redistribution, especially in this age of spiraling inequality. The rich will always get richer, and that’s ultimately unsustainable. Personally I’d do more redressing through inheritance tax, though I seem to be in a tiny crowd on that score.
In any event, taxing a small investor who gets a break is hardly going to curb the rise of the 1%, or prevent capitalism eating itself as Marx predicted.
It also does nothing to encourage a culture of saving and prudent investment. Rather, it encourages people to follow the herd into the next property bubble, given that capital gains made on your own home are entirely tax-free.
I have on my shelf a copy of Investment Made Easy, by Jim Slater. It was the first book on investment I ever bought, and it was published in 1995. Slater cites the capital gains tax allowance as £6,000.
That means the CGT allowance has gone up 77% in the 17 years since then. Sounds good, but let’s compare it to the CGT-free status for housing.
According to the Nationwide, the average UK house cost around £51,000 when 1995 began. After peaking in late 2007 at £184,000, the average price is now down to around £162,000. That’s still a gain of 217%, which means the CGT tax-free perk on housing has in money terms become much more valuable over time, compared to the CGT allowance.
Of course, CGT isn’t payable on homes at least partly because the government doesn’t want to slow down the market – and hence mobility, employment, and the like – by putting people off selling up.
But I’d still question whether our priorities are entirely in order here. At the least, an annual CGT tax-free allowance on other gains of say £20-30,000 seems appropriate.
In my case, the lack of ISA sheltering and the winners-and-losers nature of stockpicking means I’m not too badly off. I’ll be able to offset most of the gains, albeit at the cost of turnover [8] and associated fees that would make The Accumulator dizzy. Ironically, my tardiness in sheltering shares over a decade ago is going to save me thousands of pounds.
But I think this is an unusual set of circumstances, and they probably won’t be able to help me next time I sell a business or similar. (I’m not that bad a stockpicker, and I’m not that rich!)
I’ll leave the last word to Investment Made Easy author Jim Slater. Despite his championing of small cap growth shares [9], he urges his readers to first buy their own home, not least for the enormous tax break I’ve cited above. Anyone who followed his advice would have been hugely enriched by it.
Good with money [10], that Slater.
(Investment Made Easy is out of print, but active investors might want to pick up The Zulu Principle [11]
Money and investing blogs
- How to do asset allocation in five minutes – UK Value Investor [12]
- Why asset allocation should change with age – Oblivious Investor [13]
- Star fund managers and flame-out rates – Rick Ferri [14]
- Trust your way to riches – Mr Money Mustache [15]
- The end of finance as we know it –The Psi-Fi blog [16]
- Stocking picking: Confirming the case for quality [PDF] – GMO [17]
- Severe real S&P 500 bear markets in history – RIT [18]
- Plummeting bond yields everywhere – Investing Caffeine [19]
- Do you really need insurance? – The Money Principle [20]
- How to lend money to family and friends – Len Penzo [21]
Book of the week: Antony Beever’s just-released The Second World War [22]
Mainstream media money
- On market timing, Buffett, and dividends – Motley Fool [24]
- Has Angela Merkel learned the wrong lessons of history? – The Economist [25]
- The poor economics of bank robbery – The Economist [26]
- Confirmation bias, momentum, and the Euro crisis – Investor’s Chronicle [27]
- Swedroe: An investment plan to handle global crises – MoneyWatch [28]
- The risks and rewards offered by high-yielding PIBS – FT [29]
- Active investing can beat a sideways market – FT [30]
- 4.9 million fixed rate savers face interest rate shock – FT [31]
- A slew of specialist discounted investment trusts – FT [32]
- Basic tips on how to maximise your pension – Telegraph [33]
- The lop-sides rules that allowed China to secure the LME – Telegraph [34]
- Celebrities who went bankrupt [Gallery] – Telegraph [35]
- Happiness is a glass half-empty – The Guardian [36]
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