Bed & Breakfast VLS80 > VLS100?

IanManc

bowlhead99 wrote: »

No.

As your link says, they are **treated as different classes of unit** and so there is no risk of being accused of bed-and-breakfasting them, and no need to worry about 30 day rules etc, because they are different instruments.

---

What the HMRC manual actually says is:

"Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit. Any switch from one class to another within the same unit trust should be treated as a share reorganisation, see CG51700+."

Acc and Inc classes are just different classes within the same unit trust. I think you're wrong on this one Bowlhead.

masonic

Chickereeeee wrote: »

I interpret that differently.

“Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit” I take to mean it is the SAME unit, just different classes of it. Similar to going from ‘dirty’ to ‘clean’ class.

What follows “Any switch from one class to another within the same unit trust should be treated as a share reorganisation” makes it clear that moving from Acc to Inc would not be a CGT event.

...and that sentence, in full, reads "Any switch from one class to another within the same unit trust should be treated as a share reorganisation, see CG51700+."

So, following that reference takes you to CG51700, which begins:
"This Chapter deals with the share reorganisation provisions of TCGA92/S126 - TCGA92/S131. These provisions are concerned with the reorganisation of a single company’s share capital".
Which doesn't sound like the sort of thing that transpires when an investor sells one unit class and purchases another.

Reading on:
"A ‘reorganisation’ for the purposes of Part IV, Chapter II TCGA is a reorganisation or reduction of a company’s share capital - for instance an increase, decrease or other alteration - which is treated as involving neither a disposal of existing shares concerned in the reorganisation nor an acquisition of new shares or debentures issued and which represent the original shares".

So I'm not convinced of the relevance of these chapters to the topic at hand.

The dicussion here: http://monevator.com/income-units-versus-accumulation-units-difference/ reaches the same conclusion (eventually).

Yes, it seems others have independently reached that conclusion. Not sure I'd take it as being correct simply on that basis. There is a recommendation in that discussion to fire off an email to HMRC for confirmation, which would probably be sensible.

For reference, here is the original discussion where this was raised in relation to post-RDR conversions and the tax implications of being forced into a disposal in order to move out of a superclean share class when moving platforms. http://forums.moneysavingexpert.com/showthread.php?p=70745650

Edit: ...and from that linked thread, it seems the key point of contention is what is the definition of a 'switch'.

Chickereeeee

masonic wrote: »

...These provisions are concerned with the reorganisation of a single company’s share capital".
Which doesn't sound like the sort of thing that transpires when an investor sells one unit class and purchases another.

It does not say it is the same, it says it should be "Treated as..."

Or to make it clearer, take the original statement, and delete the 'background' and it becomes:

"Any switch from one class to another within the same unit trust should be treated as a share reorganisation".

No CGT event with share reorganisation, ergo....

C

masonic

Chickereeeee wrote: »

It does not say it is the same, it says it should be "Treated as..."

Or to make it clearer, take the original statement, and delete the 'background' and it becomes:

"Any switch from one class to another within the same unit trust should be treated as a share reorganisation".

No CGT event with share reorganisation, ergo....

C

Ok, I accept that interpretation. All that remains is the question of: Is a 'switch' the same as a sale and repurchase, or is the term 'switch' reserved to mean a conversion, or similar event, where no money changes hands?

dunstonh

A change in share class does not trigger a disposal is the correct stance.

However, like most things, it is not quite as clear as that. If you do a fund switch or conversion in share class it is not a disposal. However, if you do a sale and then repurchase with a different share class it does class it as a disposal. It shouldnt and maybe if it was tested by HMRC it wouldnt. However, the systems that do the buy and sale reporting do not keep them as linked.

That warning was given to advisers back when the clean share classes came out and conversions from bundled to unbundled were in full swing. They laboured on the fact you should do a switch or conversion and not a sale and buy if you wanted to avoid it being treated as a disposal for CGT.

bowlhead99

Chickereeeee wrote: »

I interpret that differently.

“Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit” I take to mean it is the SAME unit, just different classes of it. Similar to going from ‘dirty’ to ‘clean’ class.

Well, to interpret the sentence to misunderstand what a 'unit' or a 'class' is, would be a complete nonsense . For example let us swap out the terms for something more blatant which is still factually accurate per CGT rules:

“Many listed companies offer ordinary shares and preference shares. These should be treated as different classes of share”

Chickeree: "I take it to mean it is the SAME share, just different classes of it".

Me: "!!!!!!?! No, they are explicitly clarifying that it is an entirely DIFFERENT financial instrument, even though it is issued by the same company".

X units, Y units, Z Accumulation units, C Distributing units are all different classes of unit. For CGT rules, the guidance you quoted explicitly clarifies that they "should be treated as different classes of unit". They are not fungible even though they offer access to the same (or substantially similar) portfolio of underlying assets on different terms. If you sell or redeem a unit to buy or subscribe for another, that is a CGT disposal.

Only in the case of a switch or exchange performed by the manager, can you avail of the special treatment afforded to share reorganisations.

Chickereeeee wrote: »

It does not say it is the same, it says it should be "Treated as..."

Or to make it clearer, take the original statement, and delete the 'background' and it becomes:

"Any switch from one class to another within the same unit trust should be treated as a share reorganisation".

No CGT event with share reorganisation, ergo....

C

The problem is that it does not do much good to delete all background and context of the legislation and take a single line statement that could be paraphrased as 'a switch is a share reorganisation so it won't trigger CGT'.

That will get people erroneously thinking that if they place an order with their platform to dump £5000 of income units and subscribe for £5000 of acc units five minutes later, and they both get actioned by the manager at the same dealing point and settle on the same day, they feel like they have 'switched' their investment from one class to another, and so they don't have to worry about any CGT. That could be an expensive misconception.

An instruction to sell a certain type of unit and buy into a different one, or redeem out of a certain series and subscribe into another one, is a CGT transaction, because HMRC see them all as different classes and so you are disposing of one financial instrument to buy a different one.

Selling Lloyds preference shares to buy Lloyds ordinary shares, or selling Lloyds ordinary shares to buy HSBC ordinary shares, or selling ABCfund 100 Index Accumulation to buy ABCfund 100 Index Distributing, are both transactions with CGT consequences.

The re-organisation rules apply some commercially sensible logic. If Lloyds offers its investors the choice to participate in a share re-organisation where their preference shares are exchanged for ordinary shares in a certain ratio, that is allowed under the re-org rules and my new holding simply inherits the base cost of my old holding with no CGT consequences. Those rules have existed for years.

And likewise if ABCfund offers its investors the chance to exchange their class R shares for class C shares, that switch can be processed by the manager and also allowed under the re-org rules. As per the 2013 additions to the regulations (see 103F Case 1) an individual participant can exchange one class for another which has the same right to share in capital and income, and this switch of holding will result in a new holding with the same base cost as the old holding. It was important that they added that bit about individual participants exchanging their units because the RDR and platform review process took place over a period of years with individuals deciding when they wanted to allow the manager to switch them, rather than a traditional reorganisation where all the holders of one class have their holdings redenominated or absorbed into another on a particular date.

But the wording of this serves only to allow it where the previously-held class is exchanged for a substantially similar holding of the new desired class with same underlying property and income-sharing rights. If the manager does not agree to exchange one for the other, or you simply instruct to sell the old class and use the proceeds to buy the new class, then you have not been 'switched' and it is not deemed to be equivalent to a reorganisation; as Dunstonh notes, around the time of RDR and platform review everyone was screaming that you must get the manager to formally convert or switch your holding and not just sell/buy or redeem/subscribe via your platform because you would lose the protection of those CGT rules which deemed it to be the manager reorganising his capital structure.

An analogy is if I had some XYZ plc preference shares and the company was going to restructure its capital and convert them to ordinaries, I could wait for that to happen and let the company secretary issue me with my new paperwork for my new ordinaries which has been arranged by the company (a switch of my holdings from one class of investor to another which is not a disposal event because it met the criteria for reorganisation rules) OR I could just sell the preference shares and buy new ordinaries on the same day (triggering a disposal event, which might be what I want).

Likewise if I want a disposal event I can place an order with my DIY platform to sell £5000 XYZ Fund Accum and then, 60 seconds later when the platform has acknowledged that they will be clearing £5000 cash into my account on Tuesday, I can place an order to buy £5000 XYZ Fund Income, which the platform knows I can afford on the settlement date which is also Tuesday, so they accept the order. I can easily show HMRC my contract notes to say that as two separate events I decided to sell some accumulation units and buy some income units and they will acknowledge that those two types of holdings with different administrative characteristics "should be treated as different classes of unit" ; and as they are different classes of unit they will not automatically match the sale to a same day purchase, because they cannot match them, because their own guidance says treat them as different classes of unit and not the same financial instrument.

Maybe if I were nervous about the legitimacy of such an arrangement for using my annual CGT allowance I would change it up a bit so that instead of doing £5000 sell and £5000 buy both clearing on Tuesday I would do a £4800 sell clearing Tuesday and £5100 buy clearing Wednesday so it is not such a blatantly obvious manipulation.

You may question why, if you can maximise your tax allowances by dodging the anti- bed'n'breakfasting rules so easily (selling HSBC Index Acc for HSBC Index Inc instead of selling HSBC Index Acc for Blackrock Index Acc), why does this not get recommended in all the mass media and by the fund managers in their own literature? The answer is because, as Dunstonh alludes, it is not really in the spirit of the rules which HMRC set, and if they felt it was a loophole being abused by the mass market, they would likely act to close it or make a pronouncement, subject to having the time and budget to do so properly. And nobody wants to kill the golden goose.

There are all manner of laws and loopholes where law firms act in the interest of their clients in line with 'recognised market practice' rather than coming out and asking the courts or government to opine on a position. "Hey, I can't believe there is no law that stops me doing this!! Can you please confirm I can carry on doing this and you did not mean to stop me!?". Instead, they will tell their clients that it is a good wheeze to follow the recognised interpretation of the law which has created something of a loophole. But they do not sing about that loophole on their website or blog because they do not wish to advertise that a loophole exists which could be drawn closed if it was costing HMRC too much or created bad public perception of their wealthy, tax-avoiding (not tax-evading) clients.

There is some further detail in my post of two months ago (posts 5 and 6 of the thread that Masonic linked above). Meanwhile, happy Friday, it's time to hit the beach

Chickereeeee

dunstonh wrote: »

A change in share class does not trigger a disposal is the correct stance.

However, like most things, it is not quite as clear as that. If you do a fund switch or conversion in share class it is not a disposal. However, if you do a sale and then repurchase with a different share class it does class it as a disposal. It shouldnt and maybe if it was tested by HMRC it wouldnt. However, the systems that do the buy and sale reporting do not keep them as linked.

That warning was given to advisers back when the clean share classes came out and conversions from bundled to unbundled were in full swing. They laboured on the fact you should do a switch or conversion and not a sale and buy if you wanted to avoid it being treated as a disposal for CGT.

That is the interpretation that makes most sense to me (despite Bowlhead99's '!!!!!!'s above).

Fidelity (and some others I guess) allow users to perorm a 'switch' between funds with a single instruction - which results in a sale/buy, but under the control of the platform. This would seem to me to be safe (no CGT event)? If you initiate seperate sale and buy events yourself, I guess it could/would be challenged, due to traceability at least (is it the same funds?).

C

IanManc

Bowlhead, you say "That will get people erroneously thinking that if they place an order with their platform to dump £5000 of income units and subscribe for £5000 of acc units five minutes later, and they both get actioned by the manager at the same dealing point and settle on the same day, they feel like they have 'switched' their investment from one class to another, and so they don't have to worry about any CGT. That could be an expensive misconception.

An instruction to sell a certain type of unit and buy into a different one, or redeem out of a certain series and subscribe into another one, is a CGT transaction, because HMRC see them all as different classes and so you are disposing of one financial instrument to buy a different one."

But you're ignoring what the HMRC manual actually says, and for all your analogies and your !!!!!! it directly contradicts you. The manual says:

"Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit. Any switch from one class to another within the same unit trust should be treated as a share reorganisation, see CG51700+."

Malthusian

Perhaps the most useful conclusion to be drawn from this debate is that if you want to use your CGT allowance and rebase your acquisition cost, the safest thing to do is to use a different fund.

As has been detailed already, alternatives to Vanguard do exist - 50/50 into VLS 100 and VLS 60, the L&G fund, etc. There is nothing forcing you to switch from VLS Inc to Acc because otherwise you are going to mess up your portfolio balance.

Even if you believe that Bowlhead's interpretation is correct and selling Inc and rebuying Acc (and doing it as a switch or sell + buy) will not be regarded as a reorganisation by HMRC, why take the chance?

Why leave it up to HMRC to decide whether selling Inc and buying Acc was a switch (CGT rebased) or a reorganisation (CGT stays the same) when it is in their interests to treat it as a reorganisation because it means you pay more tax? They are not just judge jury and executioner, but the prosecution as well.

Someone else can be a test case, switch from Inc to Acc and find out several years down the line which of the above interpretations is correct, personally I just want to not pay unnecessary tax.

bowlhead99

IanManc wrote: »

Bowlhead99 wrote:

An instruction to sell a certain type of unit and buy into a different one, or redeem out of a certain series and subscribe into another one, is a CGT transaction, because HMRC see them all as different classes and so you are disposing of one financial instrument to buy a different one."

But you're ignoring what the HMRC manual actually says, and for all your analogies and your !!!!!! it directly contradicts you. The manual says:

"Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit. Any switch from one class to another within the same unit trust should be treated as a share reorganisation, see CG51700+."

Sorry to labour the point, but that does not directly contradict me at all. It is entirely factual that if I give an instruction to sell an Acc unit and buy an Inc unit, or redeem from one to provide the funds to subscribe to another, it is a transaction within the scope of CGT. I have disposed of an asset and bought _something else_ , and I have a gain or loss to contend with.

The two sentences in the part of the link which you chose not to bold, *agrees* that I am buying something else ; it clarifies for the avoidance of any doubt that when a fund has two types of ownership, Acc and Inc, these are to be treated as different classes of unit.

So, if someone such as the OP was worried about whether their disposal of Acc units and purchase of similar, related Inc units in the same Fund would perhaps be caught by the same-day-matching rules ; or the 30-day-repurchase, anti- bednbreakfasting rules... they can rest easy, because HMRC confirm in the guidance that "these should be treated as different classes of unit".

You have genuinely exited one thing, bought another thing, and can put the realised gain or loss from the purchase and sale of the first class onto your tax return. The second class which you bought into will have its own new cost base and well not inherit the old cost base. That is how CGT works when you sell financial instruments and buy *different* financial instruments, and HMRC do not disagree that they are different financial instruments.

As HMRC agree they are not the same class of unit, there is no question that when selling one and using the proceeds - or using new money - to buy the other, you are buying something different ("a different class of unit", per their wording) and you are not buying something of "the same class of unit". So there is no scope for accusation of bed and breakfasting after you sell and "re buy". Because it is never a rebuy of what you had, it is a newbuy of something different that you didn't have.


The piece you bolded is a separate point, which if the HMRC manual was formatted better should perhaps have its own paragraph or its own heading. It serves to confirm that a switch of fund units is treated as a reorganization for which the rules outlined in cg51700+ will apply.

The law in relation to this "reorganization" stuff was linked by me in the previous post and the previous thread, to where it is referenced in the exchanges, mergers, schemes of reconstruction regulations for collective investment schemes. And it basically says that if you EXCHANGE your holding for a substantially similar sized holding in the same underlying assets, they will treat it as a reorg the capital of the fund.

There is absolutely no implication from their handbook that if you sell something to buy a different related class, as Masonic suggested to OP, it is allowed to be matched as if it was the same asset. Because it is not the same asset, which they agree. That is the only reason they mention reorganizations, in which one asset can convert or be exchanged for another asset without a disposal being recognised.

* General rule of CGT: if you buy something the same class, it can be matched with your sale. If it is not the same class it won't be matched

* Clarification from HMRC for Funds: don't worry, Inc and Acc are considered to be different classes.

* Clarification from HMRC for Funds in respect of the reorganisation, mergers, asset exchange rules: If a fund is switched for another one, it is treated as a reorganization ; implication: no gain no loss, cost carried forward.

The latter clarification is only in respect of a Switch of fund class performed by the investment manager as an exchange of units. That type of event ties to legislation as linked. If it is not transacted as an exchange of units, but simply a person choosing to sell the A and buy the B, as desired by OP, they cannot link the cost base of B to the cost base of A.

Apologies by the way if anyone took personal offense at my '!!!!!!' comment. That was posted because of the absurdity of chickerree quoting HMRC's comment "... these should be treated as different units" and writing directly next to it "I take this to mean this is the SAME unit". No, HMRC have just told you they are DIFFERENT units of the same fund, and must be treated as different classes.

And it is precisely because they are different classes that HMRC bothered to mention the special rules which exist for share exchanges or reorganisations across classes. A sell and swift buy of a different class, is not an exchange or reorganisation.