Changing funds within a portfolio: CGT liability?

gterr

Hello,

Please could I ask a quick question (well, two actually)?

If I have a portfolio of funds (unwrapped) with, say HL, and I decide to sell some units of one fund a buy units in another fund, is this counted as a disposal for CGT purposes, even if I do not withdraw cash to an external account?

Second question: Can anyone point me in the direction of a Plain English guide to calculating capital gains when disposing of fund units? I am particularly interested in finding out how to calculate CGT when I have bought units at different times (and therefore for different unit prices) and then want to dispose of part of the holding.

Many thanks for your time.

jem16

gterr wrote: »

Hello,

Please could I ask a quick question (well, two actually)?

If I have a portfolio of funds (unwrapped) with, say HL, and I decide to sell some units of one fund a buy units in another fund, is this counted as a disposal for CGT purposes, even if I do not withdraw cash to an external account?

Yes it does count.

Second question: Can anyone point me in the direction of a Plain English guide to calculating capital gains when disposing of fund units? I am particularly interested in finding out how to calculate CGT when I have bought units at different times (and therefore for different unit prices) and then want to dispose of part of the holding.

Many thanks for your time.

You have an annual allowance of £10,900 before you are liable for any CGT - remember this is the gain you can make.

As to an easy way, there is no easy way other than to keep very careful records of your own.

A guide here;

http://www.hmrc.gov.uk/cgt/intro/basics.htm

colalba

on question one you are liable for capital gains tax. However you have an annual allowance of £10,900 (2013/14). So only have to pay tax if your gain is greater than this. If you haven't an isa it is worth considering reinvesting under in an isa to protect from any CGT in the future.

gterr

colalba wrote: »

on question one you are liable for capital gains tax. However you have an annual allowance of £10,900 (2013/14). So only have to pay tax if your gain is greater than this. If you haven't an isa it is worth considering reinvesting under in an isa to protect from any CGT in the future.

Thanks. Yes, we do have ISAs but it's going to take us 6 years to move all the unwrapped funds into them. We will have other capital gains in Year 1 but afterwards all the CGT allowances will be available, so I don't think we'll have a problem.

Just thinking ahead to the tax returns!

bowlhead99

gterr wrote: »

If I have a portfolio of funds (unwrapped) with, say HL, and I decide to sell some units of one fund a buy units in another fund, is this counted as a disposal for CGT purposes, even if I do not withdraw cash to an external account?

Yes, it is a disposal. You used to own the asset, its value changed from when you bought it, then you sold it. This will be a gain or loss. HMRC don't care if you spend the proceeds on new shares or fund units via HL, or via Charles Stanley or TD Direct, or spend it on a pizza.

The only time 'don't withdraw cash to an external account' is relevant is if your funds,shares, or cash is inside a wrapper like an ISA or a pension. As you mentioned your assets aren't wrapped, they're outside in the real world ready to be taxed - so, you can't avoid the tax by keeping the proceeds with one broker or platform.

Second question: Can anyone point me in the direction of a Plain English guide to calculating capital gains when disposing of fund units?

No doubt there are platforms or investing websites with summaries but you can get it straight from the horse's mouth in reasonably plain language on the HMRC site here, which will step you through the process.

I am particularly interested in finding out how to calculate CGT when I have bought units at different times (and therefore for different unit prices) and then want to dispose of part of the holding.

As you follow the HMRC steps there are some extra links along the way, so for example in Step 2 "Work out how much the shares cost", there's a "Selling or disposing of part of your shareholding" page.

Essentially for a normal disposal, if you buy 100 shares at 100p and later 50 of the same shares at 120p - you have a total of 150 shares and they cost you £160 total (1.06666667p each). So when you now sell a tenth of your holding in that fund or company (15 shares) you can see that the cost of what you just sold must have been a tenth of the cost of all the shares, or £16. The remaining 135 shares you haven't sold yet will keep the remainder of the cost (160-16).

There are a couple of other tricks to catch out first-timers:

1) You can't generate a huge gain by selling say 10,000 shares or fund units at 200p each with a cost of only 100p each, to use up your CGT annual exempt amount, and then buy back say 9,000 of the same shares the next day or next week to get a nice higher cost base on them. That's known as bed-and-breakfasting, and the matching rules mean you would match the 10,000 in two steps - first with the 9000 you bought after the disposal (anytime up to a month), giving minimal gains and perhaps even a loss - and only then would you match the other 1000 with 1000 of your old ones at their low average cost.

So if you are trying to make the very best use of your allowance and you are still dealing in funds you've just sold out of, it can be tricky. But HMRC cover it in their 'work out which shares you're selling' step.

2)
If the funds you hold are accumulation units rather than distribution units, they won't have been paying you cash at each periodic dividend point. Instead they just say your 100p share is now worth 102p while the distribution version stays at 100p with 2p of cash in hand. But the 2p is still taxable as income. So later when the market moves your accumulation units up to 110p, you know that only 8p of it is the capital gain that needs taxing, and the 2p is simply something that you already dealt with and reinvested.

Other than those couple of wrinkles there's not really much you can go wrong with when following through the steps. In the old days you could sometimes get reliefs if you held different types of shares for a long time, but since that was scrapped in favour of a generally lower CGT % rate, the dates aren't so important and you're just going to be adding together everything you bought at different times to get a blended average cost to compare against your sales proceeds.

gterr

bowlhead99 wrote: »

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So if you are trying to make the very best use of your allowance and you are still dealing in funds you've just sold out of, it can be tricky. But HMRC cover it in their 'work out which shares you're selling' step.

.

Thanks. And presumably HMRC have some way of preventing you circumventing these rules by, for example, me selling my fund units from my unwrapped S&S fund and giving cash to husband who then buys back inside his ISA (and Vice Versa?)

And, just for clarity, if I sold Income units and bought back the same fund but in Accumulation units within an ISA, this would be regarded as bed-and-breakfasting?

Thanks for your time.

jem16

gterr wrote: »

Thanks. And presumably HMRC have some way of preventing you circumventing these rules by, for example, me selling my fund units from my unwrapped S&S fund and giving cash to husband who then buys back inside his ISA (and Vice Versa?)

As soon as you sell the unwrapped funds you create a CGT liability.

And, just for clarity, if I sold Income units and bought back the same fund but in Accumulation units within an ISA, this would be regarded as bed-and-breakfasting?

Thanks for your time.

It would be called Bed&ISA which is allowed even if it's the exact same fund.

kidmugsy

gterr wrote: »

... presumably HMRC have some way of preventing you circumventing these rules by, for example, me selling my fund units from my unwrapped S&S fund and giving cash to husband who then buys back inside his ISA.

(i) Not that I've ever heard of.

(ii) So many funds are pretty much identical to other funds that you should consider exploiting that.

gadgetmind

gterr wrote: »

presumably HMRC have some way of preventing you circumventing these rules by, for example, me selling my fund units from my unwrapped S&S fund and giving cash to husband who then buys back inside his ISA (and Vice Versa?)

Not only don't they have rules to prevent this, but they expressly tell you that it's allowed! You don't have the 30-day share matching issue if shares are bought within a different wrapper or by a spouse.

gterr

gadgetmind wrote: »

Not only don't they have rules to prevent this, but they expressly tell you that it's allowed! You don't have the 30-day share matching issue if shares are bought within a different wrapper or by a spouse.

Brill! So no need to swap money between self and husband if all we want to do is sell from unwrapped S&S accounts and buy back same funds within ISAs!

Thanks for your time.