Introduction
The 31st of January is the deadline for filing your 2022-23 UK tax return, settling any tax liability for the year, and making any payments on account for the current 2023-24 tax year.
If you have received investment income and capital gains in the period from 6 April 2022 – 5 April 2023, it is possible that you might have a corresponding tax liability to settle at the end of the month.
There as some planning considerations to think about if you need to make these payments and we have considered these further below.
Cash or Investments?
1) Should you use existing cash or raise cash from investments?
This will depend on the size of the withdrawal. Target cash levels are below 3% for portfolios so if there is enough cash to facilitate the withdrawal then take from cash. If the withdrawal is material, say 10%, then cash may need to be raised from investments. Tax implications and trading costs are considered while being mindful of not negatively affecting the client’s risk profile/asset allocation. Typically, the portfolio manager will proportionately raise across all asset classes, such that post withdrawal the asset allocation is the same. Keeping trading costs to a minimum without affecting the client’s overall investment strategy is important. As important are the tax implications of selling down positions with material gains/losses. So, portfolio managers will liaise with the advisor to understand the client’s tax and individual circumstances.
2) Is now a good time to sell – equities vs fixed income?
From an investment perspective, it depends on the time horizon. Currently, as an investment house for balanced portfolios London & Capital are more positive on fixed income over equities – mainly for the attractive yield proposition (above 5%) available in bonds. Equity valuations look stretched in some of the growth sectors (e.g., technology) and we see value in some of the more defensive sectors such as consumer staples and health care. However long term, London & Capital remain positive on growth equities particular in structural growth areas like ecommerce, semiconductors and Artificial Intelligence (AI).
As discussed above, when it comes to raising cash choosing one asset class over another will depend on size of withdrawal, tax implications & trading costs.
3) How long can it take to raise cash? Especially if you need to consider currency conversions as well?
It is important to consider how long it can take to sell investments to raise cash, especially if the investments are in a different currency to sterling. This is so that cash can be available ahead of the deadline so that any payments can be made on a timely basis.
London & Capital strategies are highly liquid which means all securities purchased have daily liquidity. Our high-quality bias investment process screens for global brands and systematically important institutions which are traded on regulated exchanges. Direct equities and bonds will usually settle in two days from the trade date while US and UK government bonds typically settle in one day. Converting from a different currency into sterling is a regular occurrence and the process will vary on the timing of the withdrawal. The process is fluid and examples of converting to sterling immediately, in tranches or ahead/after macro data is a strength of London & Capital’s approach.
2023-24 payment on account
Bear in mind that if you are selling assets now in the 2023-24 tax year, this could also impact the amount needed for your first payment on account also due by 31st January 2024.
Considerations for US taxpayers
If you are a US taxpayer, you may have already made your UK tax payment ahead of 31st December for foreign tax credit purposes. However, if you still need to make a UK payment then you also need to consider that any trades being placed will now fall into the new 2024 US tax year.
You may have loss and foreign tax credit carryovers but note that these might be utilised for 2023 once your US taxes have been finalised for the year. Nevertheless, the start of a new tax year is a great time to consider realising gains or losses, as you have the remainder of the calendar year to balance this position out.
If investments need to be sold to raise cash, then as always, it is important to understand the position in both USD and GBP terms. This is because you might have a gain in sterling for example, but the opposite might be true once you convert the position to USD.
If you are a client of London & Capital, then this is something we will do for you ahead of placing any trades. This is because our systems and reporting assess the position in both USD and GBP.
Effective tax planning and advanced wealth structuring are critical components of preserving and growing your wealth. Our approach is rooted in providing you with the tools and strategies to optimise your financial situation. Should you have any inquiries regarding tax planning, please feel free to get in touch with our Tax & Advanced Planning team.
PLEASE NOTE: We do not provide tax advice, we collaborate with you and your London & Capital Adviser to structure your wealth in the most tax-efficient way possible.
