CGT on Vanguard LS fund

lindabea

A friend, who has vanguard investments, recently received a newsletter from them saying that 'Multi-asset funds such as our LifeStrategy funds are not liable to CGT on the gains they make within the fund.'

We're both rather confused with this statement; is it correct the way it reads, or do they mean only within the ISA wrapper? I thought all gains are subject to CGT if above the CGT allowance.

Can someone please clarify this for me.

masonic

You'd only be liable to CGT on the gains you make when you sell units of the fund. You wouldn't be liable on gains made on disposal of assets within the fund, such as when the fund rebalances its underlying assets or switches from one underlying investment to another.

bowlhead99

lindabea wrote: »

A friend, who has vanguard investments, recently received a newsletter from them saying that 'Multi-asset funds such as our LifeStrategy funds are not liable to CGT on the gains they make within the fund.'

We're both rather confused with this statement; is it correct the way it reads

The fund itself e.g. 'the Vanguard LifeStrategy 80% Equity Fund' buys investments in other funds. And those funds buy various investments, such as shares in Apple, Microsoft, Tesco, UK gilt 4.25% 2039, and so on.

When Lifestrategy 80% Equity, as an investor in other Vanguard funds, sells some of its holdings of those various underlying Vanguard funds to rebalance or to raise cash to meet an investor's redemption request; or the various underlying Vanguard funds sell some of their holdings in Apple or Tesco or UK gilts; the Vanguard funds are not liable to pay taxes on the gains they make from selling those investments.

That's because, as part of setting themselves up as a regulated open-ended investment fund, they agreed with their government and tax authority that they would not need to pay corporate taxes on the gains they made, when they made gains on buying and selling investments.

So the statement is completely true.

It doesn't mean that you as an investor in Lifestrategy 80% Equity don't need to pay taxes if you sell a share in that fund for more than you paid to buy it. You still need to pay taxes on your personal gains if you exceed your annual exemption or allowances.

But it would be very inefficient if the Vanguard fund had to pay corporation tax on the gains it made, and then on top of that, you had to pay capital gains tax on the gain you made by buying and selling the fund. You would effectively be paying tax twice on the gain, and it would be inefficient.

So what happens is, the Fund can make gains tax-free, and grow in value, and not pay tax when it sells a share of Microsoft for more than it pays for it. But if you buy a share of a fund and that share grows in value, and then it sell it, making a gain... you still need to consider capital gains tax on your own gain.

Of course if you are buying the share of the fund inside an ISA or pension wrapper you won't need to worry about tax ; and if you are buying outside a tax wrapper you still don't need to worry about tax until the gain you make in a tax year exceeds that year's annual exemption.

lindabea

Bowlhead99 - Thank you again for your explanation. It would appear that the key phrase in Vanguard's statement is 'gains they make within the fund'.

Perhaps the statement could have been made clearer, as it is somewhat misleading to the uninitiated like myself. But I'm learning a lot from your replies to my novice questions.

eskbanker

lindabea wrote: »

It would appear that the key phrase in Vanguard's statement is 'gains they make within the fund'.

Perhaps the statement could have been made clearer, as it is somewhat misleading to the uninitiated like myself.

Not sure if it's the same in the newsletter you refer to but in the version of that statement published at https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/reduce-capital-gains-tax-bill, the word 'within' is italicised for emphasis.

Audaxer

eskbanker wrote: »

Not sure if it's the same in the newsletter you refer to but in the version of that statement published at https://www.vanguardinvestor.co.uk/articles/latest-thoughts/how-it-works/reduce-capital-gains-tax-bill, the word 'within' is italicised for emphasis.

I would think most people who are invested in VLS funds will have them within S&S ISAs or SIPPs so CGT will not be applicable. It does mention at the end of the article that investors should make use of the annual ISA allowances, but I do think that it could have been made clearer at the start of the article, that CGT on VLS funds is not an issue at all if held within ISAs or SIPPs.

[Deleted User]

On a related matter, I have two products with Vanguard, a general investment account and a S&S ISA. I've just started transferring funds, £20k at the a time, from the general account to the ISA. I noticed that all gains on the general account have been left behind. In other words, capital gains on the general account were £5k both before and after the £20k transfer. I thought gains would have been transferred pro-rata. It seems I'll have to transfer every single penny out of the general investment account to ensure all current gains are wrapped in the ISA. To be fair, I'm below the CGT threshold in the general account anyway, but could someone clarify this point? Thanks.

masonic

johnsmith1890 wrote: »

On a related matter, I have two products with Vanguard, a general investment account and a S&S ISA. I've just started transferring funds, £20k at the a time, from the general account to the ISA. I noticed that all gains on the general account have been left behind. In other words, capital gains on the general account were £5k both before and after the £20k transfer. I thought gains would have been transferred pro-rata. It seems I'll have to transfer every single penny out of the general investment account to ensure all current gains are wrapped in the ISA. To be fair, I'm below the CGT threshold in the general account anyway, but could someone clarify this point? Thanks.

If you make a gain by selling an asset outside of a tax-efficient account, you can't undo that gain by repurchasing the asset within the tax-efficient account. In other words, bed & ISA is not bed & breakfast and it does count as a disposal for CGT purposes. Even if you were able to sell the whole lot in one go, move the cash into the ISA and then repurchase the assets, you'd still have made the £5k gain outside of the ISA (plus whatever gain would be applicable on the other units you held) and no gain at that point within it.

The only way to avoid crystallising that £5k entirely is to hang on and hope your funds fall in value. But personally I'd rather crystallise a gain, even if CGT were payable, than engineer a loss to avoid it. In your case it should be easy to stay within the CGT allowance and so it would be desirable to make these annual disposals.

[Deleted User]

masonic wrote: »

If you make a gain by selling an asset outside of a tax-efficient account, you can't undo that gain by repurchasing the asset within the tax-efficient account. In other words, bed & ISA is not bed & breakfast and it does count as a disposal for CGT purposes. Even if you were able to sell the whole lot in one go, move the cash into the ISA and then repurchase the assets, you'd still have made a £5k gain outside of the ISA and no gain at that point within it.

The only way to avoid crystallising that £5k entirely is to hang on and hope your funds fall in value. But personally I'd rather crystallise a gain, even if CGT were payable, than engineer a loss to avoid it.

Thanks for the explanation. It makes sense. I've got £68k to transfer, of which £8k is gain. £20k just transferred, another £20k in April, and so on. As the capital reduces I'm guessing the total gain will not exceed the CGT threshold before I have a chance to transfer it all out.

masonic

johnsmith1890 wrote: »

Thanks for the explanation. It makes sense. I've got £68k to transfer, of which £8k is gain. £20k just transferred, another £20k in April, and so on. As the capital reduces I'm guessing the total gain will not exceed the CGT threshold before I have a chance to transfer it all out.

There would be nothing to stop you selling the whole lot now and reinvesting in similar but not the same investments, which would crystallise the whole gain, which is still below the CGT limit for this tax year. You'd then carry none of that gain forward into future tax years. But you'd have experienced extremely high returns if in the next few years a £20k chunk of your investment consisted of more than £12k gains and less than £8k of your initial capital.