When are Capital Gains realised?

Fed

bowlhead99 wrote: »

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 wrote: »

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


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.

Right I follow. So if I switch from Acc to Inc units now then it'll make my tax return simpler. I'll just get the one dividend payment a year in late May (based on trustnet, can't see anything in vanguard spec)? (Even though the underlying assets have paid out dividends adding to the fund as far as i'm concerned I haven't been paid any (notional) dividends since the payment date last year?)

And all I need to concern myself when totalling up dividends for this year is when I received this notional dividend owing to the first accumulation units I purchased just before the ex-div date last year?
Is this likely to be set out on a tax voucher from II, if it was (theoretically) paid out in May then it wouldn't show up until this years? If not can I simply multiply my holding at ex-div by the dividend amount on trustnut and use this figure? Guess this would get tricky if there was multiple dividend payouts but appears to only be one. Thankfully this is a trivial amount but good to get the figures on point.

nxdmsandkaskdjaqd

EdSwippet wrote: »

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.

I have to materialise some capital gains this year. Normally I Sell and Buy on the same day, the buy being at 90% of the fund value. Does this still satisfy the capital gains requirements.

EdSwippet

Fed wrote: »

Right I follow. So if I switch from Acc to Inc units now then it'll make my tax return simpler. I'll just get the one dividend payment a year in late May (based on trustnet, can't see anything in vanguard spec)? (Even though the underlying assets have paid out dividends adding to the fund as far as i'm concerned I haven't been paid any (notional) dividends since the payment date last year?)

Right. Of course, the flip side of receiving a real (rather than 'notional') dividend is that you now have cash that you have to pay trading charges to reinvest. If you invest regularly then just roll that into the next tranche. Otherwise, £5-10 is the price of reducing the CGT workload. After all, somebody has to make money off all of this complexity...

Fed wrote: »

And all I need to concern myself when totalling up dividends for this year is when I received this notional dividend owing to the first accumulation units I purchased just before the ex-div date last year?
Is this likely to be set out on a tax voucher from II, if it was (theoretically) paid out in May then it wouldn't show up until this years? If not can I simply multiply my holding at ex-div by the dividend amount on trustnut and use this figure? Guess this would get tricky if there was multiple dividend payouts but appears to only be one. Thankfully this is a trivial amount but good to get the figures on point.

Most brokers send out usable tax vouchers, but no direct experience of II. Watch out for anything marked 'equalization'. This is an offset (return of capital) for when you have held fund units less than a year, and you don't pay income tax on that part of any payment. If you bought just before ex-dividend the chances are that most of your dividend payment is in fact equalization.

If you're comfortably inside your annual CGT allowance you may be able to ignore all this dividend shuffling for CGT calculations and be no worse off. 'Accidentally' overstating your capital gain costs you nothing if you still remain inside the allowance. Unfortunately you can't ignore these invisible dividends for income tax, though many people probably do.

EdSwippet

nxdmsandkaskdjaqd wrote: »

I have to materialise some capital gains this year. Normally I Sell and Buy on the same day, the buy being at 90% of the fund value. Does this still satisfy the capital gains requirements.

Should do. (You need to buy a different fund though).

The one or more day delay occurs on funds because they trade only once each day. When you enter a sell order the platform has to wait until the fund trades to know how much the sale will raise. So it cannot credit your trading account with proceeds until (usually) the next day.

bowlhead99

nxdmsandkaskdjaqd wrote: »

I have to materialise some capital gains this year. Normally I Sell and Buy on the same day, the buy being at 90% of the fund value. Does this still satisfy the capital gains requirements.

Not sure I follow exactly what you are doing. Are you saying you sell £10000 of a fund and buy £9000 of [something else] on the same day? HMRC do not care when or what you buy with your proceeds unless it is the exact same thing you just sold.

So for example if you bought a fund for 50p a share and it's now worth 100p a share. Your fund that's currently worth £10000 only cost you £5000 so half of it's current value is gain and half is cost.

If you sell £10,000 of (call it Fund A) and buy £9,000 of [something else] you will make a 50p gain on each of the units of Fund A you sold: you get back your £5,000 of cost plus £5,000 profit. The £5,000 profit comes out of your £11,000 CGT allowance with plenty to spare.

If however you sell £10,000 of Fund A and then buy back £9000 of Fund A on the same day (or within the 30 days following), the two transactions are matched. The shares bought for £9000 are considered to be most of the ones you sold for £10,000, and only £1000 of the sales are considered to have been made out of the ones you bought back in the old days for 50p.

So in that situation you are treated as buying 9000 units for £9000 at £1 each, sell all 9000 of them for the £1 each (£9000 cost, zero gain) and then sell 1000 for £1 each that you had initially bought at 50p each (£500 cost, £500 gain).

Due to the matching concept which is specifically designed to avoid people 'bed and breakfasting' their holdings to catch a CGT allowance, your gains are rather restricted. If you are immediately buying back 90% you have only sold a net 10%. You might as well have just sold the 10% unless I'm missing something.

If you are buying back different assets with the 90% of released funds, then that is fine and it 'satisfies' the capital gains requirements, if that's what you mean.

Fed

EdSwippet wrote: »

Most brokers send out usable tax vouchers, but no direct experience of II. Watch out for anything marked 'equalization'. This is an offset (return of capital) for when you have held fund units less than a year, and you don't pay income tax on that part of any payment. If you bought just before ex-dividend the chances are that most of your dividend payment is in fact equalization.

If you're comfortably inside your annual CGT allowance you may be able to ignore all this dividend shuffling for CGT calculations and be no worse off. 'Accidentally' overstating your capital gain costs you nothing if you still remain inside the allowance. Unfortunately you can't ignore these invisible dividends for income tax, though many people probably do.

Glad you've mentioned that (a term i'd come across but was hoping to avoid). Is equalisation payment essentially regarded as captial loss then?
Say dividends build at a uniform rate and I purchase a unit for £100 half way through the term and sell on ex-div day for £105. Dividend payout per unit is £10

So I get a 'dividend' payout after of £10 which comprises of £5 actual dividends owed to me for half the term (with basic tax already paid) and £5 equalisation (tax free).

So my capital gain = Sale Price - Purchase Paid - Equalisation (ignoring broker fees for simplification)
Which would be.......... 105-100-5 = 0

Thus if I ignored the equalisation value i'd be over-estimating capital gains (£5). And this equalisation value is just a reimbursement for 'overpaying' on purchase because of the way dividends are paid out at set dates rather than continuously?

Hope that's right :S

bowlhead99

Surely you have that backwards. If you paid 100 and got 5 back which wasn't a dividend, then you only really paid 95 for the actual shares once they had equalised you properly. Now you are taking 105 out in addition to your dividend earned. So you must have made a gain of 10.

Alternatively you can say you paid 100, and then got back 5 on equalization plus 105 on sale for a total of 110, which I think is technically less correct but gets you the same gain of 10.

Either way there's no way you make a gain of zero otherwise you got 10 of tax free money out of thin air plus the five of dividends.

Think of it this way. You bought into a fund but part of what you paid was just to buy cash income that everyone else earned before you got there. They give that back to you. So you only paid 95 for the actual shares which end up earning you 5 of dividend in their own right while you're on board, and then get sold for 105 instead of the 95 you paid.

10 profit. Not 0 profit.

Fed

bowlhead99 wrote: »

Surely you have that backwards. If you paid 100 and got 5 back which wasn't a dividend, then you only really paid 95 for the actual shares once they had equalised you properly. Now you are taking 105 out in addition to your dividend earned. So you must have made a gain of 10.

Alternatively you can say you paid 100, and then got back 5 on equalization plus 105 on sale for a total of 110, which I think is technically less correct but gets you the same gain of 10.

Either way there's no way you make a gain of zero otherwise you got 10 of tax free money out of thin air plus the five of dividends.

Think of it this way. You bought into a fund but part of what you paid was just to buy cash income that everyone else earned before you got there. They give that back to you. So you only paid 95 for the actual shares which end up earning you 5 of dividend in their own right while you're on board, and then get sold for 105 instead of the 95 you paid.

10 profit. Not 0 profit.

I see, yes that would make logical sense bowl thanks. Got confused because of the wording....so

Total Cost Price = (Cost - Equalisation)
Thus when when adding equalisation into the calculation above it become a +

So in the above example I have income of £5 in dividends and capital gains of £10

nxdmsandkaskdjaqd

bowlhead99 wrote: »

Not sure I follow exactly what you are doing.

If however you sell £10,000 of Fund A and then buy back £9000 of Fund A on the same day (or within the 30 days following), the two transactions are matched. The shares bought for £9000 are considered to be most of the ones you sold for £10,000, and only £1000 of the sales are considered to have been made out of the ones you bought back in the old days for 50p.

So in that situation you are treated as buying 9000 units for £9000 at £1 each, sell all 9000 of them for the £1 each (£9000 cost, zero gain) and then sell 1000 for £1 each that you had initially bought at 50p each (£500 cost, £500 gain).
.

Thank you for your reply on this. My plan was to sell £10,000 of Fund A and then buy back £9000 of Fund A on the same day. The remaining £1000 would be used another day. However, from your comments this does not overcome the Capital Gains Tax Rules. Is that correct?

It sounds like I have to but a different fund if I want to do the same day and buy (@90%) to comply with the rules. Is that also correct?

bowlhead99

Correct, if you buy back same thing on the same day (or within 30 days after), this latest purchase (rather than the old historic purchase) will be the one matched to your sale, and you won't cash out a gain against your initial purchase. You might only make a small gain, nil gain, or potentially a loss!

If you leave a clear month into the future before deciding to buy the same assets again, you are fine. Or if you buy something different, they can't possibly match that new purchase to the sale because they are entirely different assets, and you are also fine. But these matching rules (which you can get on the HMRC website in the cgt section) exist specifically to stop you gaming the system in the way you proposed.

If you claim to have made a gain for tax purposes while the next day you have the same assets in the account, you have not really made a gain, because you are holding the same assets with the same value and same risks as you had the day before.

So yes, buy something else if you like. Or don't buy anything. There is no requirement for you to spend the proceeds on anything at all, as far as HMRC is concerned. A sale produces a gain or loss and that is a "chargeable gain" trigger event. Buying, is not. They only care about you buying if you buy back the exact same thing because then it is like you haven't sold at all and they are not going to let you use up an allowance or pay a nice low CGT rate this year if you haven't actually sold at all and intend for the 'real' sale to happen in a different tax year.

Hope this helps you avoid a nasty surprise down the line.