My IPS, 3 of 5: Funds and accounts

Death and taxes are the only certainties, right? Not entirely. In the world of investment portfolios in the UK, neither death nor taxes are what they once seemed.

Mrs FIRE and I are both UK resident, UK domiciled fully compliant UK taxpayers. The rest of this post is probably only of interest to similarly UK-based people.

My gross income puts me in the top tax bracket (45pc), and if my earnings were all from salary I would pay an actual tax rate of about 45pc. In fact my actual tax rate paid in recent years is closer to 30pc, and Mrs FIRE even pays less than this. Paying 30pc tax is pretty reasonable to me, so you won’t hear me griping about how the government (that same government which still spends almost £100bn more than it raises, every year) should be cutting taxes. How come as a high earner I pay only 30pc tax?

I avail myself of four key tax structures:
1) tax-free accounts. I load up in full on Mr and Mrs ISAs every year, and have done for several years. I have pensions (mostly a SIPP) which is due to breach the recently reduced lifetime cap before I reach the age of 55, all being well (ie my returns being decent).

2) buy-to-let. I have some buy-to-let property. My effective tax rate on rental income is less than 10pc, thanks to deductible expenses (mostly service charges, wear and tear, and mortgage interest).

3) investing tax breaks. I typically invest money each year in private companies (via the (Seed, occasionally) Enterprise Investment Scheme) and/or VCTs. These benefit from some very significant tax breaks on both income and capital gains.

4) offshore bonds. I have been sold a couple of offshore bonds by IFAs. These have not proven to be wise investments. The returns have been poor and the fees are very high. But at least any income inside them is not taxable at this point.

In total the above four structures cover almost half of my investment income. This effectively reduces my tax bill by about a third. I still pay a lot of tax…

I try in principle to tilt my tax-sheltered investments towards the higher yielding holdings. In practice this doesn’t work too well. I am mindful that I should probably use Acc funds in taxable accounts, but I don’t – yet.

For accounts, inertia plays quite a big role here.  Mrs FIRE has only three accounts, to simplify tax reporting; one for her SIPP (which doesn’t need to be reported), one for share trading and one for holding funds.  I have about 10 accounts, accumulated for various reasons over the years.  Incremental ISA funds flow into one; incremental taxable funds flow into the lowest cost / most powerful broker.  I rarely move funds from one broker to another.

At this point I should mention my IFA.  As part of my early voyage of financial discovery, I tried using a couple of IFAs.  While neither has delivered returns above the bottom quartile, I have found the interactions quite useful.  And one of them has a clear communication style that I admire; I have in turn recommended him to a wealthy widow I know who has become a happy client. I haven’t pulled my funds because of the hassle, and because they don’t amount to much, but I certainly won’t be putting any new money to work with any IFA anywhere.

In the same vein as IFAs, I also have an account with a private banker. Most of what I have said about my IFAs applies here too, with one proviso: I do receive good service from my private bank.  I pay a lot for this service, but the peace of mind is considerable.  At some point I will sever the relationship but in the meantime I am grateful for the self-confidence that they have given me – if only that I know for certain I am better at managing my money than they are.

In the next post I look at my Target Allocations in detail.


11 Comments on “My IPS, 3 of 5: Funds and accounts”

  1. BB says:

    On the Acc/Inc funds… I have almost exclusively Acc on the basis that I am planning holding long term and want them to grow however I’ve recently been thinking that rebalancing would be easier if these were Income payers so I could direct the proceeds to where I want to top up. Interesting that you’re thinking the reverse.

    The private bank account confuses me a bit…. what benefit do you get from that? Have never seen the point!

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    • @John: Thanks for your point. I feel a lack of clarity about Inc vs Acc funds and your point that there is no tax advantage has me breathing a big sigh of relief. Where do I read up on this more?

      @BB: re private bank. I have been struggling to recall the examples of good service, but they include a) giving me a mortgage (priced, with hindsight, very competitively) secured on assets not income, b) enabling various foreign currency transactions before I had a ready way to do this c) facilitating large one-off purchases e.g. a car at very short notice d) finding me a sensible place to park some tax bill money for 9 months that enabled me to make money from the government’s money e) managing a portfolio for me that hasn’t done well in up markets but was reassuringly flat during the 2008/9 down market.

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      • Monevator says:

        @FvL — I’d be really interested in hearing more about the mortgage secured on assets not income. Perhaps even a detailed post? It’s really hard to find good information about this, and even harder to find people who have been through the process, except where the mortgage was secured on other property, which perhaps is what you experienced — I’d be interested in hearing more about a mortgage secured ideally on an investment portfolio but failing that a business.

        Pleased to see your blog off to such a good start — lots of comments for a new website!

        Liked by 1 person

      • Quick answer: this mortgage is >10 years old and was secured on an investment portfolio.

        Longer answer via a blog post: thanks for the suggestion. I will add it to my queue.

        Thanks for your kind words – I have nothing to triangulate my blog performance on so I take your kind words very positively.

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  2. John says:

    Not sure if this was what you were implying, but there’s no tax advantage to holding Acc funds – income that’s accumulated is still taxed in the exact same way as if it were distributed.

    Liked by 1 person

  3. Stan says:

    Inc v Acc – Monevator has explained the difference clearly here: http://monevator.com/income-units-versus-accumulation-units-difference/

    As for tax, as John says, there is no difference. Income is still income if it is reinvested.

    I’d be interested to know how you select your ‘tax break’ investments and how they have performed.

    Also, have you considered setting up an account with Vanguard directly? I haven’t done it but am tempted as it would avoid the risk of loss through the broker/platform.

    Liked by 1 person

    • @Stan – many thanks for that link. Very useful to know there is no tax difference.

      My ‘tax break’ investments are broadly similar to my ‘tax exposed’ investments, but with a tilt towards higher yield / UK securities (as I don’t think I can reclaim withholding taxes from USA investments), and the higher yield investments feel like they make use of tax free accounts better.
      My ‘tax break’ investments have performed roughly in line with my other investments. I am looking into writing a portfolio returns analysis post so look out for that.

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  4. Mr Zombie says:

    ==> “3) investing tax breaks. I typically invest money each year in private companies (via the (Seed, occasionally) Enterprise Investment Scheme) and/or VCTs. These benefit from some very significant tax breaks on both income and capital gains.”

    Mind if I ask how you choose these? Perhaps you work in corporate finance of some kind? Seems like a pretty risky investment, but really interesting🙂

    Mr Z

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    • @MrZ: I would say don’t try this at home! I have quite a lot of experience of this mostly through professional connections: for instance, I have backed two businesses set up by guys I used to work with, which have both done really well. These have led to other such word-of-mouth opportunities. My network in London is a good one and is another reason why I am not interested in a FIRE strategy that involves leaving this amazing city.

      In point of fact I would not recommend any VCTs. I saw a league table a few years ago that suggested almost all of them had negative since inception returns. I know that one or two have posted good numbers since but as you know past performance is not a reliable indication of future returns… but they do get some awesome tax breaks hence I mention them.

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  5. […] My IPS, 3 of 5: Funds and accounts My $100m tax-free account? […]

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  6. […] is here, and I have set out the detailed reasoning behind it in four prior posts here, here, here and […]

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