CGT on Shares Fund

J

jpmackey

New Member
Messages
10
Hi all,

New user, site is a great resource!

I am hitting an age (30s) where I am taking my retirement plan seriously and am trying to understand how to calculate/estimate CGT on shares over the long-term.

My goal is to build up an equity fund of app. €800k and use that to bridge the gap between early retirement at ~50 and receiving my deferred DB pension (plus ARF) at ~66 (subject to change).

So I initially built an excel model that is along the lines of;

Year; CashIn/Out; ROR; FundValue
1; 40,000 7% 42,800
2; 40,000 7% 45,796
etc.

The trouble I am having is working out the withdrawal + CGT into it from then on;

Year; CashIn/Out; ROR; CGT; FundValue
20 -50,000 4% ? ?
21 -50,000 4% ? ?
etc.

One way I have simulated is to multiply the ROR by a (1-CGT) percentage ie 4%*0.67 however that only holds true for 1 year, beyond which it undervalues the fund as unrealised gains mean the ROR is applied to a larger number.

Another cut-throat way is to apply 33% CGT to all withdrawals, but while prudent, is excessive I think and could mean the difference in years of early retirement.

I am not expecting to have exact numbers for how much CGT I will pay each year. Fundamentally I am looking to have the average yearly CGT in there and thus have a sense if my plan will work in the long-term (16 years) ie will I run out of money or not. I am aware that ROR are not the same each year and I plan to test the model against historical returns to build a further analysis on the likelihood of success, but feel I need to grasp the CGT calculations properly first.

My current attempt uses the follow structure based on my latest understanding of CGT & FIFO;

Year; ExpectedExpenses; TotalFundValue; NonGainFund; Gain; GainFund

Where the Gain is the TotalFundValue x ROR% and the GainFund is the cumulative gains year to year, leaving the NonGainFund as the cumulative input cash only (cost).

So, based on my understanding of FIFO, in year 1 of retirement if I sell shares to use as yearly expenses, after 15 years of growth I am likely selling shares that have experienced significant growth. I therefore take the ExpectedExpenses from the GainFund and divide by 0.67 to give the required withdrawal to leave the required expected expenses available. When the GainFund eventually gets to near 0 after about 10 years, I start using up the NonGainFund (my original cash invesment) and thus don't divide by the 0.67 as little to no CGT should be owed on original capital.

Am I in any way on the right track here? Or is there a simplified way of applying CGT to long-term projections for such a model?

Also, any opinions/comments on my overall strategy of having a "early-retirement" bridging fund going into a DB pension + ARF would be much appreciated.

Many thanks,
JP
 
jpmackey said:
I am not expecting to have exact numbers
Click to expand...

This really is the key point. Any such long-term projections have little value.

If you have 20 years to go to early retirement, an awful lot can happen which will scupper your Excel spreadsheet
1) You might not want to retire at 50
2) The CGT rules might change
3) You might get married
4) You might get divorced

The 7% seems very optimistic. It might be met, but it might be a lot less.
It certainly will be a lot less in real terms i.e. after inflation.

You will be buying a portfolio of shares - say 10 shares.
The CGT will be on the shares you sell. So if you buy AIB this year and BoI in 5 years, and then sell BoI, you will be paying CGT on the BoI shares - and not first in first out.

The best long-term investment for you is your pension fund - I assume you have maxed that out.
The next best is to buy your own home and pay off the mortgage. Have you done both of these?

When your pension fund is maxed out and your mortgage is cleared, then invest in a diverse portfolio of shares.

They might fall in value in which case you won't be able to fully retire at 50.
Or they might do much better than 7% in which case you might retire earlier.

Brendan
 
jpmackey said:
So, based on my understanding of FIFO, in year 1 of retirement if I sell shares to use as yearly expenses, after 15 years of growth I am likely selling shares that have experienced significant growth. I therefore take the ExpectedExpenses from the GainFund and divide by 0.67 to give the required withdrawal to leave the required expected expenses available. When the GainFund eventually gets to near 0 after about 10 years, I start using up the NonGainFund (my original cash invesment) and thus don't divide by the 0.67 as little to no CGT should be owed on original capital.
Click to expand...

That is not how it works.
If you buy €100k worth of shares in AIB today
They will be worth €400k in 20 years at 7% a year.

If you sell €40k in 20 years, the CGT calculation will be as follows

Proceeds: €40k
Cost: €10k
Capital Gain : €30k
CGT @33%: €10k

There is no separate "gain fund" and "original investment"
 
First of all, using a 7% annual return seems a bit excessive to me too

And you have not taken into account inflation - 50,000 might be fine today, but in 20 years and 3% inflation, you would need 90,000 to buy the same amount of goods and services
 
Brendan Burgess said:
This really is the key point. Any such long-term projections have little value.

If you have 20 years to go to early retirement, an awful lot can happen which will scupper your Excel spreadsheet
1) You might not want to retire at 50
2) The CGT rules might change
3) You might get married
4) You might get divorced

The 7% seems very optimistic. It might be met, but it might be a lot less.
It certainly will be a lot less in real terms i.e. after inflation.

You will be buying a portfolio of shares - say 10 shares.
The CGT will be on the shares you sell. So if you buy AIB this year and BoI in 5 years, and then sell BoI, you will be paying CGT on the BoI shares - and not first in first out.

The best long-term investment for you is your pension fund - I assume you have maxed that out.
The next best is to buy your own home and pay off the mortgage. Have you done both of these?

When your pension fund is maxed out and your mortgage is cleared, then invest in a diverse portfolio of shares.

They might fall in value in which case you won't be able to fully retire at 50.
Or they might do much better than 7% in which case you might retire earlier.

Brendan
Click to expand...

Thanks a mill, Brendan, really appreciate you sharing your knowledge with me.

It does seem like the spreadsheet model may be just an academic exercise and will not be as helpful as I expected to be.

I have paid off my mortgage and increased my pension contributions to app. 15% vs. a limit of 20%. The reason I haven't maxed it out is because my AVC DC fund is tied to my DB pension which means I cannot avail of any of it until 66 (without taking a actuarial adjustment of course which doesnt favour those that hope to live long). Therefore I have come to the conclusion that maxing out my contribution, while I will be better off aged 66 and on, will reduce the likelihood of retiring young (say at 50) as it will mean less money going into my bridging fund. Is that logical?
 
You are doing great. Paying 15% instead of 20% is close enough to maxing out.

Invest in a diverse portfolio of shares will give you the most flexibility.

One other thing to be aware of - I have known some people who were determined to retire at 50 and lived very frugally in the meantime to achieve it. You are well off. I am not suggesting you go on a spending spree but enjoy your wealth and if it means not retiring until 51, so be it.

And another thing. No matter how much you have at 50, you will still not be sure that it's enough and probably won't retire.
 
Brendan Burgess said:
That is not how it works.
If you buy €100k worth of shares in AIB today
They will be worth €400k in 20 years at 7% a year.

If you sell €40k in 20 years, the CGT calculation will be as follows

Proceeds: €40k
Cost: €10k
Capital Gain : €30k
CGT @33%: €10k

There is no separate "gain fund" and "original investment"
Click to expand...

Thanks for this, I understand. It is the same as selling a piece of land correct? I am selling X% of the asset's current value, thus I take X% of the original cost as the cost.

jpd said:
First of all, using a 7% annual return seems a bit excessive to me too

And you have not taken into account inflation - 50,000 might be fine today, but in 20 years and 3% inflation, you would need 90,000 to buy the same amount of goods and services
Click to expand...

Point taken, am I better off to use an annual return that accounts for inflation on expenses - so say 7% minus 3% = 4%?

ClubMan said:
Another thing to factor in is income and taxation related to any shares that pay dividends.
Click to expand...

Thanks. I was going to ignore any dividend income and hence ignore the income tax on it - so dividends will be purely an additional bonus.

ClubMan said:
Couldn't you do AVCs via an AVC PRSA instead and that would be accessible from age 60 or even earlier (50 I think?)?
Click to expand...

No - as my AVC is tied to my DB pension I can't withdraw it at 60.

Brendan Burgess said:
You are doing great. Paying 15% instead of 20% is close enough to maxing out.

Invest in a diverse portfolio of shares will give you the most flexibility.

One other thing to be aware of - I have known some people who were determined to retire at 50 and lived very frugally in the meantime to achieve it. You are well off. I am not suggesting you go on a spending spree but enjoy your wealth and if it means not retiring until 51, so be it.

And another thing. No matter how much you have at 50, you will still not be sure that it's enough and probably won't retire.
Click to expand...

Thanks so much, Brendan, it is reassuring to know I am generally on the right track.

I take your point about living too frugally - while I am quite frugal in general I do allow for annual expenses that I value such as holidays and dates with my wife; I have even allowed for double the number of holidays in early retirement and €100 a week purely for daily coffee shop visit with her, which to me now in my current circumstances I would consider wasteful, but not in the future.

I am actually quite sure I won't really retire at 50; more likely I will pursue other passions that I choose to do rather than having to work for money, with the outcome of that passion still likely to yield some form of income...

Thanks again.
 
jpmackey said:
Thanks for this, I understand. It is the same as selling a piece of land correct? I am selling X% of the asset's current value, thus I take X% of the original cost as the cost.
Click to expand...
Not sure why you're comparing it to land.
That seems unnecessarily complicated.
Say you buy 100 shares in a company today at €50 each.
Then you buy another 50 next year at €60 each.
Then a few years down the line you sell 125 shares for €80 each.
Your capital gains is (125 x €80) - ((100 x €50) + (25 x €60)) and you still hold 25 of the shares that you bought for €60 each.

So that's a gross capital gain of €10,000 - (€5,000 + €1,500) or €3,500.

You should read the Revenue guidance documents if you still don't understand as they provide some worked examples.
 
ClubMan said:
Not sure why you're comparing it to land.
That seems unnecessarily complicated.
Say you buy 100 shares in a company today at €50 each.
Then you buy another 50 next year at €60 each.
Then a few years down the line you sell 125 shares for €80 each.
Your capital gains is (125 x €80) - ((100 x €50) + (25 x €60)) and you still hold 25 of the shares that you bought for €60 each.

So that's a gross capital gain of €10,000 - (€5,000 + €1,500) or €3,500.

You should read the Revenue guidance documents if you still don't understand as they provide some worked examples.
Click to expand...

My problem with understanding it this way is that I don't deal in whole shares - I technically own fractional shares of a value in companies. Do I need to work it all out on that basis? Is it not easier to say I sold x% of a shareholding and thus attribute x% of the original cost? This seems to be how Brendan explained it.

Brendan Burgess said:
I had assumed you were single as she didn't get a mention in the first post.

Have you children?

That changes all the financial calculations.

Brendan
Click to expand...

No children and no possibility of having any. My wife works part-time but we bundle all finances together. She will also receive a deferred DB pension at 66 which I have included as contributing to our expenses when at that age (lowering its value by the rate of inflation).

Would the above change your thinking on my current strategy?
 
jpmackey said:
My problem with understanding it this way is that I don't deal in whole shares - I technically own fractional shares of a value in companies. Do I need to work it all out on that basis? Is it not easier to say I sold x% of a shareholding and thus attribute x% of the original cost? This seems to be how Brendan explained it.
Click to expand...
The same general approach to determining acquisition costs and calculating capital gains applies to fractional shares. I can't see where the complications arise.

If you bought one share for €50 and later sell 0.25% of it then your effective acquisition/base cost for capital gains purposes is €50 x 0.25% = €12.50 and you retain 0.75% of the share with an effective acquisition/base cost of €37.50.
 
ClubMan said:
The same general approach to determining acquisition costs and calculating capital gains applies to fractional shares. I can't see where the complications arise.

If you bought one share for €50 and later sell 0.25% of it then your effective acquisition/base cost for capital gains purposes is €50 x 0.25% = €12.50 and you retain 0.75% of the share with an effective acquisition/base cost of €37.50.
Click to expand...
And I get that. I am confident I could calculate my CGT for a given sale using fractional shares in the future. But what I’m trying to do is model the long term impact CGT will have on my fund. The average net CGT to apply each year to a given withdrawal amount. Not easy?
 
Brendan Burgess said:
Not necessary as it’s just not meaningful
Click to expand...

I think I get you - that to assume some average yearly constant CGT adding up to an accurate total liability is likely too big an error and thus a pointless exercise?

What would standard financial planning advice be?
So if someone was living off a fund of say €1m that cost them €500k, would it be best to just take €165k (33% of gain of €500k) off the top of the fund and live off a €835k fund value instead? (notwithstanding other variables of course). How do we account for the ongoing yearly gain and thus CGT liable?

OR...is there a standard annual ROR that can be applied to a fund value that is evidenced to account for both volatility (to a degree of success) and CGT liabilities? Wishful thinking?!
 
I think you are thinking too much about this.

You can't predict the rate of return.
You can't predict the rate of inflation.
You can't predict the tax rates in 20 years.

jpmackey said:
How do we account for the ongoing yearly gain and thus CGT liable?
Click to expand...

It's not a yearly gain.
You should not have a fund by the way, but a portfolio of individual shares.
You might have some without gains and might choose to sell them first and not pay any CGT.

When you die, the CGT liability, disappears - under current rules. (These are stupid rules and I hope it's changed)

Key Post - Tax and investment planning for married couples

I am surprised that there is no guide to this important issue so I will write one. I am neither married nor an expert on tax, so corrections welcome. In the interests of making the hypothetical examples easy to follow, I refer to people as Husband and Wife. The examples are true of any spouses...
www.askaboutmoney.com
 
You must log in or register to reply here.
Back
Top