When are Capital Gains realised?

Fed

Hi,

I'm planning on using up my CGT allowance by selling Vanguard 80% LS and buying 100% with the proceeds. Just to confirm, my capital gain is effective once I sell my 80% holdings and the money arrives in my trading account right?

I don't have to actually withdraw the money from the trading account (iii) and into my bank in order for it to be recognised as capital gain?

Silly question but just trying to get everything in order.

Thanks

slinga

Correct afaik.

EdSwippet

Fed wrote: »

I'm planning on using up my CGT allowance...

Not everyone bothers to do this, but your future self will thank you for it.

Fed wrote: »

... by selling Vanguard 80% LS and buying 100% with the proceeds. Just to confirm, my capital gain is effective once I sell my 80% holdings and the money arrives in my trading account right?

Pretty much. Your capital gain crystallizes on the date of record on which you sell. When the money arrives from the broker is immaterial. In II, expect to be 'out of the market' for one day -- sell before the 'cut-off' and II should credit your account the day after, when you can then buy your replacement fund.

Moving from 80% to 100% raises your risk profile. If this bothers you, you could keep it the same by splitting your repurchase equally between 60% LS and 100% LS.

Fed

EdSwippet wrote: »

Not everyone bothers to do this, but your future self will thank you for it.



Pretty much. Your capital gain crystallizes on the date of record on which you sell. When the money arrives from the broker is immaterial. In II, expect to be 'out of the market' for one day -- sell before the 'cut-off' and II should credit your account the day after, when you can then buy your replacement fund.

Moving from 80% to 100% raises your risk profile. If this bothers you, you could keep it the same by splitting your repurchase equally between 60% LS and 100% LS.

Thanks, taken a bit of time to get my head round it but almost there.

My original plan was to move from 80% Accumulation to 80% Income units but whilst the general consensus seems to be that this would crystallize capital gains (actually selling and buying as opposed to instructing a switch between the two), I haven't been able to get confirmation that this wouldn't be classified as bed and breakfasting. Therefore i've decided to go the safe route and switch to 100%. I'm comfortable with 100, still have a low proportion of my savings invested in the markets

EdSwippet

One other thought...

These particular Vanguard funds are not the ideal vehicle between which to switch to use up CGT allowance. They have a 0.1% 'dilution levy' -- under the covers this is stamp duty -- and you will pay this each time you transfer between them. Most other funds don't do this (they hide the stamp duty in tracking error/charges).

You'll want to be sure, then, that using your CGT allowance is worth that 0.1% of assets. It probably is if you have worthwhile gains, but still something extra to consider. A switch like this every year is equivalent to increasing the fund TER from 0.24% to 0.34%, and not entirely desirable.

Fed

EdSwippet wrote: »

One other thought...

These particular Vanguard funds are not the ideal vehicle between which to switch to use up CGT allowance. They have a 0.1% 'dilution levy' -- under the covers this is stamp duty -- and you will pay this each time you transfer between them. Most other funds don't do this (they hide the stamp duty in tracking error/charges).

You'll want to be sure, then, that using your CGT allowance is worth that 0.1% of assets. It probably is if you have worthwhile gains, but still something extra to consider. A switch like this every year is equivalent to increasing the fund TER from 0.24% to 0.34%, and not entirely desirable.

Understood.

Currently sitting on an 8.85% gain so it's well worth me cashing in this year (unless of course there's a ~1.5% gain on the day that i'm out of the market)


I don't suppose there's any preferable time to do the switch over the next 3 weeks? Nothing to concern myself about selling before/after ex-div date so long as the transfer goes through before the end of the tax year? Ideally i'd run it up to the end of the tax year to maximise potential allowance but want to make sure the transfer goes through. (Some of my regular investment purchases have taken a few days to go through)

Cheers

bowlhead99

You don't even need the whole 'transfer' to go through by end of tax year. You just need to have exited the current fund by end of tax year. Remember there are public hols for Good Friday right at the end of the year and same again with Easter Monday at the start of the next. So you should probably aim to put the orders in within the next couple of weeks rather than running it up to the death.

You are right that there is nothing to be concerned about exdiv dates. The fund is receiving its dividends from underlying portfolio companies all the time. The almost arbitrary date that they decide to declare a dividend themselves does not change the overall net assets that you are entitled to when you consider that your true NAV position is the value of your share of the assets (and liabilities) within the fund plus any cash you are owed from the fund paying you a dividend.

As to maximising your annual allowance by not cashing in until the last moment: that is fine if NAVs moved smoothly over the year, the longer you leave it, the more it's worth. You could presume that the '5% plus inflation' growth would accrue on a straight line basis. And so over the 250 business days in a year, the price would inflate by 0.02% plus inflation every day. It would be worth waiting a week for another 0.1%.

But in reality nothing moves in straight lines. As you say there could be 1 or 2% change in one day, positive or negative. So, if you are sitting on several percent gain as of mid-March you might as well just go with that IMHO. If there is another big surprise swing up over next few weeks and you make another 5%, cash that gain out too if you really want to and buy something else again.

EdSwippet

Fed wrote: »

I don't suppose there's any preferable time to do the switch over the next 3 weeks? Nothing to concern myself about selling before/after ex-div date so long as the transfer goes through before the end of the tax year?

Since you ask, and contrary to bowlhead99... potentially yes, there may be a preferable time.

The fund's NAV will sink when it goes ex-dividend, by around the amount of the dividend (so approx 1.3% for Vanguard LS 80). You can see this directly on income units, but it's hidden on accumulation units. It's still real, though.

If you sold the day before ex-dividend all your 8.85% gain will fall under CGT. If you sold the day after then 1.3% of your 8.85% gain is returned to you as a dividend on which you may have to pay full marginal income tax (you might get some 'equalization', but few other offsets), and 7.55% remains as capital gain. It's a hit you could do without.

This is, of course, if 'all else remains equal', which it never does. Your income tax on the dividend might push up to 0.52% of holdings (40% of 1.3%), but then 0.52% is an average day's volatility, so timing it purely because of this might nevertheless not work in your favour.

All of which goes to show that what you thought of initially as a 'silly question' turns out to be far from silly after all.

Fed

Thanks bowl

I think I follow Ed, so ideally you'd sell the day before ex-div, buy back on ex-div. As a result you'd not receive any dividends, all gains would be capital ones and you'd escape without any tax liability (even though it would have already been paid at source) (assuming you haven't gone over you CGT allowance) and you'd (all else equal) be better off?

I think i'll do the move soon then. The extra dividend isn't going to push me into a higher tax bracket so I don't think ill get too fiddly with it, in my experience it doesn't seem consistent when II process the trades so don't know I would even time it right, i'd rather just minimise the time i'm out of the market.

One last question (not that it applies here if I do my transfer soon) if I sell Accumulation after ex-div, is the dividend just wrapped up the sale price? There's no trail payment when the dividends theoretically get paid out like there would be if I owned Income units?
I ask because i'm wondering what tax year dividends fall. I believe they owe to the year they are paid out which seems to be in May for these funds but if I sold Acc after ex-div and before the end of the tax year would they accrue to the current year?
(This might be covered on the tax voucher from II but I don't believe I got one last year even though I began investing couple of weeks before ex-div)

Original question felt silly ed, but very glad you've clarified other more tricky stuff

bowlhead99

Sorry yes I missed the point. My comment on your choice of sale date vs div ex-dates being irrelevant for the value received was really a standard answer to a common question on here in relation to "Nothing to concern myself about selling before/after ex-div date??" ; generally no there is nothing to concern yourself about because you'll still get the value in your hand as divi or as sale proceed, it is not like you lose out on total (pre-tax) value received by timing it badly.

If you are not a high rate taxpayer you don't pay tax on the divis just like you don't pay tax on the gains if you have spare annual allowance.

So consider a fund where the shares are worth around £1100 having been bought for £1000 and they are about to declare £1 of divs.

If you sell the shares before they go ex div on 1 April 2015, you will get £1100 cash which is £100 of gain. It uses up £100 of your CGT allowance in the tax year 2014/15.

If you sell the shares after they go ex div on 1 April, you will get £1099 of div and then you will also get £1 of divs in late May 2015. It uses up only £99 of your CGT allowance in the 2014/15 tax year and then when you get the divs in the 2015/16 year you will either pay tax on them (if a high rate taxpayer) or you won't (lower rate taxpayer).

So, there is a planning opportunity if you are not a high rate taxpayer as it seems neater to only use £99 of your CGT allowance and save more CGT allowance in 2014/5 for other things, and then get a tax free dividend later, instead of use £100 of your allowance and not get a a tax free dividend. If there is a risk that getting £1 of income in the 2015/16 tax year would push you into high rate tax, and you have plenty of spare CGT allowance, makes sense to just sell it before the dividend entitlement day.

If you are instead looking at Acc units - then if you sell on 2 April, the value of the share (its disposal price), is just the same as it was the week before (£1100). Unlike the Inc units, the shares don't drop by the dividend value on 1 April.

However as an Acc unitholder, to decide whether you can increase your base cost for CGT purposes by the value of the dividend that you 'earned' and whether that earning is taxable on you (only if a high rate taxpayer) , you would need to know when the distribution shares' income is deemed capitalised. Off the top of my head I'm not sure if this would be with effect from the first day of the next accounting period (1 April) or the day of / day after the formal distributions (1 June) to be in line with income shares - you could probably check the prospectus for the answer. If it was the later date, in line with the income shares, you wouldn't have reached that date when selling on 2 April and you would have no income recognised.

EdSwippet

Fed wrote: »

... you'd sell the day before ex-div, buy back on ex-div. As a result you'd not receive any dividends, all gains would be capital ones and you'd escape without any tax liability (even though it would have already been paid at source) (assuming you haven't gone over you CGT allowance) and you'd (all else equal) be better off?

Yes. It's called 'tax arbitrage'...

Fed wrote: »

... if I sell Accumulation after ex-div, is the dividend just wrapped up the sale price? There's no trail payment when the dividends theoretically get paid out like there would be if I owned Income units?

No trail payment, but you do get a 'notional' dividend on which real tax is immediately payable. You then have to remember to add this notional dividend to your fund purchase costs, so that it is excluded from your computed capital gain (otherwise you end up paying both income and CGT on it!).

Accumulation units are fine in SIPPs and ISA, but can be intensely painful in non-sheltered accounts. Personally I avoid accumulation units in taxable accounts; the CGT calculations readily turn into even more of a nightmare than normal, despite the best of record-keeping.

You might think about switching into income units yourself when you do this juggle. Your future self could thank you for that, too.