Now is the time to be thinking about capital gains tax, with the ending of the tax year. I have never had reason to be concerned about CGT before. I’ve always done my stock market saving in ISAs apart from a rush of blood to the head in the dot-com bust. I do know one fellow who got into hot water at that time by making a shedload in the run-up, incurring a reasonable amount of CGT, which he struggled to pay because he, er, reinvested and got hammered in the bust. Ouch.
Looming large is the accumulated detritus of decades at the coalface of The Firm, in particular the last ten years when I was trying to reduce my higher rate tax liability but wasn’t close enough to retirement to unleash the big bazookas of pension savings.
If there’s one lesson to take away from this – Sharesave: Just Do It.
I was always a fan of sharesave – nobody’s ever offered me a one-way bet on the stockmarket before or since, so I filled my boots.The trick with sharesave is to keep on turning up. Most of the time it’s a damp squib or a minor jolly down the pub, but every so often your boat comes in and you get a great one-way win on the stock market without eating the corresponding risk. Just do it, though how you do it depends on whether you can cancel previous schemes to get the lowest share price or have to spread yourself evenly across schemes. Many people get bored with the dry periods, it so happens that the boat came in just as I left The Firm – the profit on the last Sharesave is probably half of the total profit I made on sharesave while working there. In total over my career Sharesave paid me probably about a year’s final salary tax-free; over nearly twenty-five years working for The Firm that adds up to about a 4% pay rise across my working life.
Obviously the statistics for another company will be different, what makes sharesave so unique is it’s a rolling one way bet on the share prices rising. You just can’t lose. Most people, sadly, saw no longer than the end of their noses, and having to do without £3000 a year out of post-tax pay for the first five years was too much to pay for the opportunity to jump at the chance of a 4% pay rise. After the first five years they can pay for succeeding Sharesaves from the proceeds of the first lot.
To reduce HRT exposure as I crept into the HRT band I started with ESIP – a share incentive plan. You get to pay up to £125 per month into a share incentive plan, which immediately buys that much of shares in the FTSE100 firm I worked for. Later on they softened it to that I could make a lump-sum purchase of up to £1500 a tax year. This comes out of pre-tax pay, so as I was drifting into HRT it was the first obvious win. I got paid dividends on the shares as soon as I bought them, and had to hold for five years to avoid paying tax. I always religiously sold in the year after they came out of the embargo period, on the usual principle that as an employee you want the least additional exposure to the firm you work for, because if the firm has a hard time you get to lose your job and your savings at the same time.
As the good people at Northern Rock or Enron discovered, for God’s sake don’t needlessly increase your strategic exposure to your employer while still employed with them. The tail risks are very nasty indeed. That’s obviously not what sharesave and ESIP are all about, but you have to watch your tail 😉
The trouble with buying stock £125 at a time, is that the calculation for capital gains tax is really, really, hateful. Most of my gains are due to sharesave, buying at 70p and selling at about four times that. However, the pool of shares is polluted with all those itsy-bitsy ESIP purchases – in the round these roughly doubled, with dividend reinvestment and the 41% tax and NI bung added.
I’ve only got shares in The Firm outside my ISA, so I will sell £10,000 of this lot this tax year, and a similar amount next year. Not all of that is a capital gain, of course, but mathematically the capital gain must be less than the annual CGT allowance of £10,600, and my disposal is of course less than four times the allowance too. One thing that was interesting from HMRC is that if you keep your shares in the share incentive plan until disposal there is no CGT to pay, however I was unable to work out if this applied to me as I don’t work for The Firm anymore. If you still work for the employer, and I know an awful lot of people at The Firm will have a big sharesave come out next year, assuming it doesn’t all go titsup, then it’s worth really understanding what HMRC mean here.
Approved share incentive plans (SIPs) If you keep your shares in the SIP until you dispose of them, you will have no Capital Gains Tax to pay in respect of this disposal. If you keep the shares after you take them out of the plan and dispose of them later, your cost for capital gains purposes will be their market value on the date the shares leave the plan.
It looks like if you sell your shares straight from the Equiniti SIP/Sharesave corporate nominee share scheme you don’t take a hit for CGT whatever the gain, but do please ask the Sharesave team because it isn’t 100% clear to me, but it might be useful to those of you still at the coalface 😉 They usually hold a Q&A teleconference just before maturity which may be useful to attend.
Selling my part-holding will give me the problem of having the vilest asset class of all, cash, which is rotting daily by the devaluing charlatans at the Bank of England.
A year’s CGT allowance is conveniently about the same amount as an ISA allocation, but I already have funds allocated to that, so I will probably switch the proceeds for something tediously boring but not cash, like 60% Vanguard Lifestrategy and 20% Vanguard Europe and 20% gold just to observe the disgusting brutality that QE will do to the pound. The CGT clock will start ticking again on these unwrapped shareholdings, of course, but at least it’s an easier calculation than 60 monthly ESIP purchases 😉
This will still leave me with a lot of The Firm’s shares, but brought down to a more manageable amount of only a third of my total holdings. The Firm fits well into a HYP, so once I have finished loading my ISA with savings I shall bed-and-ISA those unwrapped residual holdings of The Firm over a couple of years