Convert Acc to Inc class

hparker

My fund platform cannot do a conversion from acc to inc class of the same funds, they say I must sell and buy. They told me it will not create a taxable event for capital gains. Is this correct?

Can I transfer out specific fund holdings (not all my holdings, just the funds I want to convert) to a platform that does support conversions? Or do you always have to transfer out all your holdings from one platform to another?

AnotherJoe

Removed my previous text, this seems to show it doesn't create a chargeable event.
https://money.stackexchange.com/questions/99919/can-i-convert-fund-acc-units-to-inc-units-without-triggering-a-cgt-event


You do not have to transfer all your holdings from one platform to another.


What is your rationale for doing this?

talexuser

I'm amazed this is possible, looks like an unintended by-product of the change to clean classes?

bowlhead99

hparker wrote: »

My fund platform cannot do a conversion from acc to inc class of the same funds, they say I must sell and buy. They told me it will not create a taxable event for capital gains. Is this correct?

That sounds incorrect.

If the fund manager doesn't literally exchange your shares/units of one class for the other, but instead has you sell/ redeem out of one class and buy /subscribe in to another class, this would have to be a chargeable event. Because you have disposed of one type of financial instrument and acquired a different financial instrument without it being a 'reorganisation' of the company or fund.

If the platform arranges with the fund manager for your holdings to be directly exchanged, that is ok and no chargeable event.

As per Joe's link: "in a straightforward switch, where no consideration is given or received apart from the old units and the new units, the switch would be treated as not giving rise to any disposal for CGT purposes". However if there is a disposal for cash and an acquisition for the same amount of cash, with two contract notes, using the proceeds of the disposal settling on the same day to fund the purchase, that is not an exchange of the old units for the new units. It's two transactions in two different shares.

You have to be careful because the latter might be described in layman's terms or by some providers' terminology as a 'switch', when your fund manager and HMRC do not see it as an exchange at all because the fund manager didn't convert or exchange one type for another.

Can I transfer out specific fund holdings (not all my holdings, just the funds I want to convert) to a platform that does support conversions? Or do you always have to transfer out all your holdings from one platform to another?

Some platforms don't support partial transfers out, or don't support it on certain account types - but others do. So it would depend on whether your current platform will let you transfer just part of your assets somewhere else without transferring the whole lot and closing your account entirely. A question to ask your platform provider.

hparker

Thanks. I will query the fund platform about why they claim it will not create a CGT event.

AnotherJoe

I wonder if its because you buy the "same" security within less than 30 days?

Now that B&B isnt allowed?

londoninvestor

It's frustrating trying to find anything clear about HMRC's view of the case where you don't do an official "switch" but you simultaneously (or very close together in time) buy one type of unit and sell the other.

HMRC's guidance in Tax Bulletin 28 says:

HMRC wrote:

On a separate point, we have been asked to explain the CGT treatment where an investor switches between income units and accumulation units in the same sub-fund of an authorised unit trust umbrella scheme. Section 102 TCGA 1992 does not apply in these circumstances. This is because both the old units and the new units (treated as shares by Section 99 TCGA 1992) provide rights to participate in the same separately pooled part of the scheme property.

(emphasis mine)

https://webarchive.nationalarchives.gov.uk/20110617050218/http://www.hmrc.gov.uk///bulletins/tb28.htm#authorised

The significance of the emphasised bit is that it would imply that Inc and Acc units in the same fund are not different "classes" of share in the meaning of CGT legislation.

This is from 1996 (so in fact it was the Inland Revenue, not HMRC!) but I'm not aware of it since being superseded.*

However, even in that document, only the case of a straight "switch" is referred to. HMRC never seem to have directly addressed the case we're talking about here.

Being cautious, this would make me nervous of doing the pair of transactions and either claiming it wasn't a taxable event (which you might want to do in order to not pay CGT) or claiming it was a taxable event (it would sometimes be very convenient if you could use all the year's unused allowance up by resetting the base cost of a holding just by switching from Acc to Inc).

The flipside is that a more aggressive person than me might decide that they could take whichever view was convenient, and HMRC would be on shaky ground when challenging them.


* However, since this was written, we have introduced the concept of a Section 104 holding, and that does pose a challenge for the view that Inc and Acc are not separate share classes. If they're the same class, they should form part of the same S104 holding, but that doesn't make sense when they trade at different prices.

hparker

I have had a reply from the fund platform.

"Normally selling a fund will be classed as a disposal. However a 'Switch' from one class to another within the same fund is a share reorganisation and not treated as a disposal of the taxpayer’s existing shares or an acquisition of new shares and new shares issued are treated as though they were acquired at the same time as the existing shares."

hparker

I have had a reply from the fund platform.

"Normally selling a fund will be classed as a disposal. However a 'Switch' from one class to another within the same fund is a share reorganisation and not treated as a disposal of the taxpayer’s existing shares or an acquisition of new shares and new shares issued are treated as though they were acquired at the same time as the existing shares."

Agree with this?

bowlhead99

londoninvestor wrote: »

The significance of the emphasised bit is that it would imply that Inc and Acc units in the same fund are not different "classes" of share in the meaning of CGT legislation.

It doesn't imply that. They *are* different classes of share.

What they were getting at with that explanation was:

(1) A collective investment scheme can be one umbrella entity composed of separately pooled 'parts', or 'sub-funds'. For example Vanguard Investment Funds ICVC is the overall scheme legal entity but within that entity you have Vanguard Global Equity Fund, Vanguard US Equity Index Fund, Vanguard UK Long Duration Gilt Index Fund, etc etc. Each of those parts has its own pool of assets and owners

(2) There is a rule about collective investment schemes with such 'separate parts', called section 102. Its effect is to tell you that if someone is allowed to exchange their shares in one part for shares in another (e.g. I ask Vanguard to kindly flip me out of their UK Gilt fund into their US Equity fund please), then although it is all happening within one big Vanguard Funds ICVC legal entity, the special 'reorganisation' provisions of section 127 (which allow you to treat your new asset as having the base cost of your old asset) shall *not* apply.

(3) The reason the reorg rules don't apply in that situation is because I am disposing of one segregated compartment of assets and acquiring a completely different pool of assets which is a different sub fund, even if it has the same directors and manager - and the reorganisation rules should not be allowed to prevent the exchange of my interests in those different funds constituting a disposal and acquisition for CGT. The fact that Vanguard are allowed to have one big legal entity running 11 different balance sheets for their 11 different strategies is an administrative convenience for them, but even if they choose to let me exchange my interests in one fund for another, HMRC will say I have exited the first fund and gone into the next as a disposal and acquisition.

(4) However, if someone is not exchanging their interests in one pool for another (Vanguard US Equity for Vanguard UK Gilt), but is instead staying in the same pool (Vanguard US Equity Class A Inc for Vanguard US Equity Class A Acc), then section 102 [the bit that prevents S127 reorganisation rules operating] doesn't apply. In other words, this bit about S127 reorganisation rules not being able to be used on a switch from US equities to UK gilts is irrelevant in a switch from class Inc to Acc, because "both the old units and the new units provide rights to participate in the same separately pooled part of the scheme property." Instead, S127 rules which allow reorganisation treatment are not prevented from operating, and it can be a reorganisation *if* it's a straightforward switch with no consideration other than the old units for the new units and it's the same sub fund (e.g. Vanguard US equity)

However, even in that document, only the case of a straight "switch" is referred to. HMRC never seem to have directly addressed the case we're talking about here.

That's because the rules about whether a 'straight switch' with no consideration changing hands can constitute a reorganisation, might be seen as a complex area; reorganisations and mergers have their own sets of rules and there are bits of law which need to be followed correctly.

By contrast, selling one financial instrument and buying a different financial instrument on the same day - redeeming out of one fund class and subscribing for newly issued shares of another fund class - is not complex, and should not need HMRC to issue guidance. Acquisitions and disposals (which is what placing a buy order or a sell order is), are generally well understood as the concepts are not new. Some of us by now even know and understand the s104 pool rules and the anti-bed-n breakfasting 30 day rule (though not relevant here because two classes of fund units are two different financial instruments).

So, you'll perhaps see HMRC seeking to clarify that a manager exchanging (switching) your units will lead to reorganisation rules being used (if the classes are in the same sub fund) or not using those rules (if the classes are in different sub funds). But you won't see them seeking to clarify 'what happens if I sell/ redeem a fund unit and then buy/ subscribe for a different type of fund unit', because that should be obvious. You have a sale and a purchase for CGT.

For confirmation that Inc and Acc are different financial instruments (so could not get pooled in a S104 pool or have the 30 day rule apply), you could see this bit of the HMRC gains manual: https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709 .

The page mentions that the two types of units should be treated as two separate classes of units, although if there is a switch it will be treated as a reorganisation. That particular page is on unit trusts rather than OEICs, but there is another one https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57755 which notes that classes of unit in a unit trust are analogous to classes of share in a corporate OEIC. That should allay your fear of Inc and Acc units in the same fund not being recognised as different classes for CGT.

The terminology of 'switch' used on that page is their laymans language for a share-for-share (or unit-for-unit) exchange - the underlying CGT law on reorganisations is all about exchanges of ownership interest. It should not be confused with when some providers talk about you 'switching' as a generalist term for deciding to buy something else in your account (e.g. I would like to switch my Invesco High Income fund for a L&G Property fund please).

The problem when looking around the internet for guidance is that people use terminology differently.

For example, Person 1 might say that the two choices are (a) Switching one set of holdings for a new set of holdings by asking the manager to convert them for you; versus (b) selling out of your old holdings and buying into new positions. So he says the two choices are either 'switch' (no CGT impact) or manually sell/buy on your platform (CGT event).

However, Person 2 might say that the two choices are (x) Conversion of one class to another, arranged by the fund manager; versus (y) switch out your old units for new units by selling off one lot and buying into the new ones. So he says the two choices are 'conversion' (no CGT impact) or manually switch (CGT event).

The two people are talking about the same thing and both understand the rules; 'a'='x' = reorganisation with no CGT impact, while 'b'='y' = CGT event. Unfortunately person 1 used the word 'switch' during event 'a' (which is what HMRC call it), while person 2 used the word 'switch' during event 'y' which is what some platforms and advisers call it ; and 'a' is the opposite choice to 'y' even though people are using the same word in a sentence describing the event.

As an aside (in case this is not long enough already:

There has been some later rules / guidance issued more recently than the stuff from the archives we are quoting, as it was a hot topic around the time of the retail distribution review when everyone was launching new clean classes of fund shares to replace the old high-fee retail ones that allowed platform and adviser commissions. The two classes would be legally different financial instruments with exposure to same underlying assets other than for the administrative features like management fee level or minimum holding size.

It was clarified that if the manager reorganised his fund by converting more than a certain portion of his old class to the new one, it was a reorganisation; he is literally re-structuring his capital while the investors keep the exposure to its underlying assets. But new legislation also recognised that there was going to be a lot of converting going on and managers shouldn't have to convert everyone in the fund all at once - so even one individual (instead of a whole class of shareholders all at once) who was exchanging his shares within the pool (e.g. US equity sub-fund) for a different class that had substantially the same set of underlying assets, would be able to benefit from the share-for-share exchange rules of having it be treated like a reorganisation. As long as it is literally exchanged, rather than doing a sale and purchase. http://www.legislation.gov.uk/uksi/2013/1400/regulation/11/made?view=plain

Being cautious, this would make me nervous of doing the pair of transactions and either claiming it wasn't a taxable event (which you might want to do in order to not pay CGT)

Yes, I would be nervous of separately booking a purchase order and a sales order and claiming that I had exchanged one set of shares for another and it should be treated as a reorganisation of the fund's capital.

By contrast if the manager says he will exchange whatever my shares are worth at the next valuation point for that exact amount-worth of shares in another class of the same subfund, without any form of cash settlement, I would be happy that no CGT event was triggered. If my platform couldn't explicitly confirm that was going to happen, I would assume they were going to do a sale and purchase and use the proceeds of the disposal to settle the other on the settlement date. Something that has proceeds of a disposal, is a CGT event.

or claiming it was a taxable event (it would sometimes be very convenient if you could use all the year's unused allowance up by resetting the base cost of a holding just by switching from Acc to Inc).

Yes, it is a convenient concept which I've mentioned here before, although 'switching' (exchanging) is not going to trigger a reset; you would want to ensure you definitely got sales proceeds from one and used it to buy the other (even if they settled same day). If you wanted to be crystal clear that they were two events you could do them on different days - no 30 day rule to worry about because the gains manual I linked says they are not the same class of share.

People who are tax experts tend to keep their interpretations of tax law to themselves unless you are willing to pay them for it. One reason for doing that if a tax firm has a page on their website saying that selling inc and buying acc is a great wheeze to use your CGT exemption, you might be less interested in paying them for advice. And if word about that tax expert's view gets around via an MSE mailshot to 10 million people, everyone starts doing it and at some point there is enough (potential) lost tax revenue for HMRC to decide to seek changes of what might be perceived as a 'loophole for the rich', and it kills the golden goose.

The flipside is that a more aggressive person than me might decide that they could take whichever view was convenient, and HMRC would be on shaky ground when challenging them.

I think HMRC and the fund management community are well aware that a switch (exchange) can get reorganisation treatment with the new shares inheriting the cost of the old ones, whereas a sell and buy of two different share classes cannot. HMRC would just point to the law if they didn't like what you did.

If they're the same class, they should form part of the same S104 holding, but that doesn't make sense when they trade at different prices.[/I]

They don't form part of the same S104 holding if they are different classes. Only identical classes of share in the same company or fund should be in the s104 pool - they have to be fungible, homogeneous for you to use the concept of average purchase cost, which doesn't work if you have some with different properties and values to others.

hparker wrote: »

I have had a reply from the fund platform.

"Normally selling a fund will be classed as a disposal. However a 'Switch' from one class to another within the same fund is a share reorganisation and not treated as a disposal of the taxpayer’s existing shares or an acquisition of new shares and new shares issued are treated as though they were acquired at the same time as the existing shares."

Agree with this?

I agree that a switch from one class to another, in the same fund, performed for you by the fund's manager/ administrator, is a reorganisation. However, you said that they had told you that they could not arrange for such a conversion to be performed, and you must order a sell and buy.

I would press them on their answer . Tell them you want to 'switch' all your existing shares for new shares of the other class - and you do not know what price will be obtained for the 'sell' of the shares you currently hold. So, how can you know what value of new shares to order with the 'buy'?

If they agree that obviously you have to wait until the first order has been accepted and the valuation point reached before you know exactly how much to buy to effectively 'switch' your shares, so some of the buy will have to be done on a second date, you can ask them how that stacks up with their advice that it would be a 'reorganisation'.

hparker

bowlhead99 - Remarkably informative post!

I would press them on their answer . Tell them you want to 'switch' all your existing shares for new shares of the other class - and you do not know what price will be obtained for the 'sell' of the shares you currently hold. So, how can you know what value of new shares to order with the 'buy'?

If they agree that obviously you have to wait until the first order has been accepted and the valuation point reached before you know exactly how much to buy to effectively 'switch' your shares, so some of the buy will have to be done on a second date, you can ask them how that stacks up with their advice that it would be a 'reorganisation'.

Just to clarify, is the key point that a sell takes place at all, i e. any time there is a sell followed by a buy then it cannot be a true CGT exempt event conversion. By contrast a true CGT exempt conversion would exchange a predetermined number of units for a predetermined number of units, and any market price movement during the process would not affect the outcome?

Would the fund platforms assertion that their "switch" was a CGT exempt reorganisation be admissible if they confirm that any market price movement between sell and buy will not affect the number of units held, i.e. exactly the same number of units will be held and there will be no residual cash balance or deficit (gain or loss) regardless of any fund unit price change between the sell and buy? Or would this of itself not be sufficient to support their "reorganisation" stance?