Tax planning, March – April 2023

As stock market returns continue to underwhelm me, I have concentrated on the details of tax planning in the past few weeks.

Tax

Most of my portfolio is in tax protected accounts (ISA and SIPP). A smaller part of my portfolio is in a trading account that I am running down to zero. I am using it to top up my ISA each year and to fund our drawdown expenditure. When I sell from the trading account any capital gains could be subject to tax.

My plan for capital gains tax is to make use of the tax-free amounts each year to minimise the tax on my gains. That meant that I could have a gain of £12,300 in the year to 5 April 2023. This reduces to £6,000 next year, and to £3,000 for the year after. The tax rate for my situation is the basic rate of 10% because I am not a higher rate taxpayer and the assets being sold are equities. That 10% is not too onerous if I do have to pay it. I may even choose to pay it if I know or suspect that rates are to be increased in future to 20% or more. I would do that by selling and realising my gains more quickly. I will likely aim to sell out of these non-tax protected investments sooner rather than later because of the trend to higher taxes. Alternatively, if I am faced with a much higher tax rate, such as 40%, then I can choose to not sell and not realise the gains. I can keep my trading account holdings and continue to take the dividend income from them. I would need to top that income up by beginning to draw income from my ISA and I wouldn’t be able to top up my ISA.

April tax planning

I made no investment changes in March, except for dividends being re-invested in my tax-sheltered accounts and paid out in my trading account.

On 4 April I sold shares in the dealing account generating gains in the old tax year that will utilise my tax -free allowance. I expect to pay only a small amount of tax. On 6 April when the funds from the sale were available, I transferred sufficient cash into my ISA and re-bought the same shares in the new ISA year. The remaining cash I placed on deposit where it will cover three months of drawdown spending.

March results

Here’s a belated review of March.

A market review (J. P. Morgan) stated that “global growth has generally surprised positively during the first quarter of 2023” and “developed market stocks returned nearly 8% over the quarter.” They added that “UK equities underperformed global equities over the quarter but still delivered just over 3%.”

My benchmark, the FTSE All Share Total Return index fell by -2.84% in the month, and is up by +3.08% for the year to date. My investment return for the month was a loss of -2.69%. I suffered a loss of -0.34% for the year to date behind both the UK and global markets.

My individual holdings recorded an unweighted average share price movement of a loss of -1.77% for the year so far. They ranged from a loss of -9.35% on a property trust to a gain of +6.76% on a UK Equity Income trust.

Capital and income

Starting from an index value of 100.00 on 31 December 2013, my capital is now 133.02, as shown in the graph above. This is -5.66% down from its all-time peak in March 2022. Investment return for the year to date of a capital loss of -1.58% and dividend income of +1.24%, results in a loss of -0.34%. Draw down expenditure deducted -0.78% for the year to date. Therefore, capital was down -1.12% for the year to date.

Annual dividend income as a percentage of the opening portfolio value on 31 December 2013 has increased from 3.37% to reach another new peak of 7.14% at this month end, as shown in the graph above. My current portfolio dividend income yield is 5.37%, i.e., 7.14 divided by 1.3302.

Cash and expenditure

My annual drawdown spending is now around 3.38% of my portfolio value, based on the last two years spending and the opening and closing values for that period. Cash holdings cover about two months of spending. Dividends being paid out in cash each year from my dealing account are sufficient to cover about three months of spending each year. I raised more cash on 4 April.

Draw down spending was 65.91% of my portfolio income in the last twelve months which is more than the figure of 62.29% for the previous twelve months. Portfolio income rose by only 0.78% as more dividend income was received. Expenditure rose by 6.64%. This is below both the CPI and RPI inflation measures.

Conclusion

I am pleased to have completed my tax planning for the tax year just ended and to have filled my ISA for the tax year just started. I’m choosing to remain fully invested and to be not too concerned with my capital losses. My glass is half full. I can wait for the market to refill it.