Accumulation and Income funds CGT?

boxwood

Does selling accumulation units and buying income Units, or the other way around, crystallize a capital gain?
A source I have found that addresses the question states:
"A unit trust or open-ended investment company is a company for capital gains tax purposes and units in the same unit trust or shares in the same OEIC count as shares. Therefore when one type of share is exchanged for another within the same company the exchange is treated as a share-for-share transaction and no disposal arises."
Is this correct?

ColdIron

Grab a nice cup of tea, settle in and have a read of these

https://forums.moneysavingexpert.com/discussion/comment/73461090#Comment_73461090 post 6 onwards
https://forums.moneysavingexpert.com/discussion/5500004/bed-breakfast-vls80-vls100 post 8 onwards

dunstonh

Does selling accumulation units and buying income Units, or the other way around, crystallize a capital gain?

If you do it as a switch, it is classed as a disposal for CGT.

If you do it as a conversion then it is not classed as a disposal for CGT.

Not all platforms support conversions. The distinction is that a switch is a sale and purchase. A conversion is not a sale and purchase but a reorganisation.

bowlhead99

It is clearly defined that different classes of shares in the same fund are to be regarded as separate financial instruments for CGT purposes. The rule you posted has come up a number of times and people generally misinterpret it without the wider context.

Effectively if a manager restructures the fund and allocates you a new class of shares in exchange for your old ones it's treated as a share for share exchange and your new shares inherit the base cost of your old ones for tax purposes. That's much the same as in normal (non fund) companies where the share capital can be restructured and someone issued A shares in replacement of their B shares or Ordinary shares in exchange for their Preference shares or some class of equity in exchange for their loan notes etc. You end up with a new class of asset but your cost is unchanged.

The rules were usefully clarified around the time or RDR and the platform review where people were on legacy 'high fee' bundled share classes which allowed for kickbacks to an investment advisory/intermediary or fund platform and the new FCA regulations wanted managers to be able to offer people to move to the new share class but didn't want to trigger big tax effects.

Initially the tax law implied it had to be a proper 'company restructure' with a certain percentage of that class of shares being moved or offered to move, but the rules were later changed/ clarified so that it was clear that even one person could request to move to the clean class without it necessarily happening at the same time as loads of other people being moved and it would still qualify for treatment as a restructure where you effectively had exposure to the same assets after the switch with just some administrative difference in your share class vs the previous share class you held.

So generally it's clear that if the manager exchanges your holdings for one of a different class but an administrative difference (level of management fee, minimum holding size, Inc vs Acc) it is not a 'disposal' and no CGT event occurs.

However. That's if the manager is literally exchanging one type of share for another where he has agreed to do that for you or he instigates it himself with no cash to change hands. If instead you choose to redeem out of one class and subscribe to another class, you are acquiring a new financial instrument for yourself even if the way you intend to settle your obligation to pay for it is by using the cash proceeds which would be allocated to you from the settlement process of redeeming your old shares.

Buying a new financial instrument with proceeds of a sale or redemption of a different financial instrument is not going to be a 'non-event' for CGT and as such your moving from Inc to Acc or vice versa by redeeming and subscribing in quick succession and getting two separate contract notes from your fund platform is something that should trigger a CGT calc and a new base cost.

If you're wanting to create that effect (crystallise a gain) but are nervous that it might seem like it's just a "share for share exchange" due to not being fully conversant with the definitions, then you can remove the scope for any ambiguity by selling Fund 1 Acc and buying Fund 2, then the next day sell Fund 2 and buy Fund 1 Inc. Then it will be extremely clear from the paper trail that you did not simply exchange Fund 1 Acc for Fund 1 Inc.

Whereas if you don't want to create a CGT event you would have to approach the manager (through your platform/intermediary if necessary) and see if he will convert one class directly to the other, as dunstonh says - not all places will let you do it.