Guidance on investment funds

debbie42

musehead wrote: »

If you cash in your fund investment and then invest in another one, but the money stays inside the fund account (outside any tax wrapper of course) do you still pay CGT on any sale amount above the annual allowance? Or is the fund account treated as one investment and you only get taxed when you withdraw profits in cash to your bank account (this would be much simpler!).

If it's the former, this would seem to be a reason not to undertake rebalancing if you have a large portfolio, as you'll end up paying CGT despite not actually getting your hands on the cash (assuming it all goes back into other funds).

My understanding is that it's the former: you are actually realising profits, albeit temporarily. I imagine that it's as well to do such rebalancing each year to make use of any annual allowances if you feel the need or you'll only be putting off the inevitable. Especially now taper relief is defunct? Alas, it's not something that has ever affected me directly. Now maybe it will in another year or so...I can dream

munk

musehead wrote: »

If you cash in your fund investment and then invest in another one, but the money stays inside the fund account (outside any tax wrapper of course) do you still pay CGT on any sale amount above the annual allowance? Or is the fund account treated as one investment and you only get taxed when you withdraw profits in cash to your bank account (this would be much simpler!).

If it's the former, this would seem to be a reason not to undertake rebalancing if you have a large portfolio, as you'll end up paying CGT despite not actually getting your hands on the cash (assuming it all goes back into other funds).

Yep, that's more or less what I'm getting at If tax is levied when you rebalance your portfolio it's a major incentive not to do so or at least a major headache

debbie42

munk wrote: »

So in total that's £10000 profit - but do you pay CGT of 18% on £800 (ie is the cgt calculation made on the combined 2x£5000) or would you class it as 2 seperate CGT 'events' - ie no CGT to pay because the profit is less than the threshold in both 'events'? Sorry, maybe this isn't making things any less confusing!

I see what you're getting at now. Earlier I wasn't sure if you were just talking of liquidating profits and leaving the original amount in the fund.

It's easier than you think: your CGT allowance is per annum, and how many trades you make is completely irrelevant. It's your overall annual profit that matters. Don't forget you can offset your losses too (if you have any, of course :rolleyes:)

acjc

ishares are doing a FTSE BRIC 50 ETF (BRIC), which I understand tracks 50 of the biggest companies in BRIC.

Firstly I've not bought ETFs before, but from what I've read they seem to offer a low cost way of tracking the markets in the country of your choice, and can even track the price of various commodities like oil, gold, wheat, pork bellies (!) etc. And you can just buy them like shares. What are the main drawbacks though?

Is this a good way to gain exposure to BRIC?

I'm not a great fan of managed funds, as whilst a fund might beat the market for a few years, it is quite hard to maintain this performance. Plus the fees are higher as well. But having said that I do already have investment trust shares (a China fund, and a Pacific ex Japan fund).

I also have a lowish risk portfolio of about 10 FTSE100 companies, so am looking at further diversification. I'm a buy and hold investor, so am in it for the long term.

Opinions on the future prospects for BRIC seem to be divided. On the one hand, some people think that current BRIC stockmarket levels are far too high and that we're in a bubble which will burst soon. Plus corporate governance and transparency isn't up to western standards yet, so there is increased risk of corruption, embezzlement, arbitrary nationalisation etc e.g. the Russian government seizing oil assets from private companies. On the other hand, BRIC is where most of the future growth is, manufactures most of the world's goods, produces a large proportion of the world's natural resources, has half the world's population who are only just getting started on the "western consumer lifestyle". I tend towards the optimistic view, especially in the long term, but I'd be interested to hear other opinions.

munk

Opinions on the future prospects for BRIC seem to be divided. On the one hand, some people think that current BRIC stockmarket levels are far too high and that we're in a bubble which will burst soon. Plus corporate governance and transparency isn't up to western standards yet, so there is increased risk of corruption, embezzlement, arbitrary nationalisation etc e.g. the Russian government seizing oil assets from private companies. On the other hand, BRIC is where most of the future growth is, manufactures most of the world's goods, produces a large proportion of the world's natural resources, has half the world's population who are only just getting started on the "western consumer lifestyle". I tend towards the optimistic view, especially in the long term, but I'd be interested to hear other opinions.

Was reading something today - I think it was HL's 'Investment Times' in which they said that it's predicted that 'all four will be among the six largest global economies in the world by 2050; China is forecast to eclipse the USA as soon as 2039'. On that basis I guess it depends what your definition of 'long term' is

I guess in the short term there will be bubbles (like I guess night might follow day ) but if BRIC exposure is weighted properly as part of a well diversified portfolio then at least those bubbles should be mitigated somewhat. There's an interesting graphic in the HL magazine as well which shows the annual performance of the BRIC economies over the last 5 years - the performances are all over the shop in terms of rankings for the four and the volatility is insane. The graphic has a caption recommending no more than a max of 10% exposure to BRIC as a whole... presuming that's for 'balanced' / medium risk investors.

jamesd

CGT counting is triggered by "disposals". A disposal is a sale or a transfer (perhaps of shares or funds into an ISA or to a child but not a spouse). At each disposal the gain (or loss) is calculated and added to the total for the year. At the end of the year the allowance is subtracted from the total and you pay tax on anything left above the allowance. So:

Buy A for 10,000 and it grows to 20,000. Sell 10,000 worth as disposal 1. This disposal has a gain of 5,000 because this portion was bought for 5,000 and sold for 10,000. So write 5,000 in gains column 1. Hold the remaining 10,000 A and it grows to 30,000 but you don't sell any by the end of the tax year so this doesn't matter.

Buy B for 10,000 and it drops to 8,000 and you sell all 8,000 worth. Disposal 2. Loss 2,000 in the "gains" column.

Buy C for 8,000, grows to 24,000, sell 12,000 worth. Disposal 3, cost was 4,000 gain was 8,000 into the gains column.

End of year:

1. gain 5,000
2. loss 2,000
3. gain 8,000

Total gain 5,000 -2,000 + 8,000 = 11,000. Less 9,200 CGT allowance leaves CGT to pay on 1800. At 18% that tax due would be 324. Not so bad after making a profit of 11,000.

Funds held in ISA, pension or investment bond wrappers, among others, don't count for this. Note that an investment bond, typically only encountered for lump sums exceeding 50,000-100,000, is not the same as an investment trust, unit trust or OEIC - it's a tax wrapper like the pension or ISA that holds funds inside it.

Putting all of test investments into BRIC funds is asking for trouble when the inevitable happens and they fall. It's just like buying technology funds before their crash. Better to at least moderate it with a global growth or UK equity income fund so you get to see some of the benefits of a diversified portfolio with different growth and drop rates and timings. Then every six months say, make the split 50:50 again by selling some of one and buying the other to lock in the gains or exploit a price drop.