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CGT and tracker fund fungibility
jamesd
Posts: 26,103 Forumite
in Cutting tax
How fungible are funds from different providers in the eyes of HMRC? Context is selling to realise a capital gain to use the annual CGT allowance and not wanting to be completely out of the relevant market areas until the time limit for rebuying without it being considered a continuous holding expires.
Would selling say an ETF FTSE100 tracker using derivatives to track and buying a derivative-based ETF from another provider be sufficient to be non-fungible? What about switching from one that uses derivatives to one that holds real shares or one that uses different security from the first?
In more plain English, if you sell a share or fund to get a capital gain and buy it back later, it's treated as though you never sold it unless a certain amount of time has passed. But for this to apply the sale and purchase must be of interchangeable - fungible - investments that are not distinguishable from each other. And I'm asking how dissimilar they need to be before HMRC might consider two different funds to be the effectively the same.
Would selling say an ETF FTSE100 tracker using derivatives to track and buying a derivative-based ETF from another provider be sufficient to be non-fungible? What about switching from one that uses derivatives to one that holds real shares or one that uses different security from the first?
In more plain English, if you sell a share or fund to get a capital gain and buy it back later, it's treated as though you never sold it unless a certain amount of time has passed. But for this to apply the sale and purchase must be of interchangeable - fungible - investments that are not distinguishable from each other. And I'm asking how dissimilar they need to be before HMRC might consider two different funds to be the effectively the same.
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Comments
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ETFs are like investment trusts, traded freely on the markets under their own individual tickers, but not quite as independent as investment trusts, there's usually a managing company over all the ETFs from a particular provider. Also like unit trusts and OEICs. They aren't wrappers in the ISA or pension sense but hold investments, managed internally by the investment manager, not by the tax payer who buys them. The tax payer cannot give instructions to the manager to buy or sell individual investments inside any of these, you buy it all or none of it.
Personally, I use unit trusts and OEICs, not ETFs, but ETFs are the case that would be closest to fungible that it can be, because there's usually no hint that the fund manager is doing more than trying to track the underlying index closely. They can sound similar - FTSE 100 tracker ETF (or investment trust, or unit trust or OEIC) from company A or FTSE 100 tracker ETF (or...) from company B, both trying to track the FTSE 100 index as closely as possible.
Even when tracking the same index, different ETFs have different tracking errors (deviations from perfect tracking), different risk levels (derivative-based may track more closely but have more counterparty risk than direct holding of the underlying shares) and different fees.
For an investor a switch from one company's tracker to that of another company is a way to stay invested in a collection of companies that is very similar to that of the one they are selling, but not quite identical. Close to within half a percent or less on performance terms could be expected. Close enough that it's conceivable that HMRC might want to regard them as fungible even though they aren't strictly identical. Close enough that the performance difference of the investments is minimal in comparison to the potential tax gain from swapping from one to another after a good year and locking in the use of the CGT allowance.0 -
Thanks jimmo. Do you have any investments in a pension, not of the final salary type? How about a stocks and shares ISA? Those will be in unit trusts probably and that's what I'm asking about.
My guess is also that I'm worrying about nothing.
ticker: the short sequence of letters used to identify a stock quickly, like BT.A for a particular type of British Telecom share or MSFT for Microsoft.
OEIC: Open Ended Investment Company, a variation on the unit trust theme with slightly different rules. More common than unit trusts these days.0 -
jimmo, thanks, that coincides with my thoughts.
So far as leverage goes, not all ETFs are leveraged and most holdings in them are of the unleveraged kind. They range all the way from quite tame to reckless, depending on what you are after. Anything from simply tracking UK government bonds (gilts) or overnight bank deposits to leveraged to the hilt in emerging markets or commodities.
Some are sufficiently tame that they don't quality to be held in a stocks and shares ISA and have to be held in the cash ISA version instead, because there's no real chance of losing even 5% of the capital value. Not that I know of any cash ISAs that allow holding this sort of investment.0
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