Sell & re-buy to crystalise CGT

lozzy1965

And without wishing to pry into your personal relationship circumstances, you can sell your investment and buy the same investment for your partner, and vica versa, to maintain the same / similar investments between you and realise a gain.

EthicsGradient

RomfordNavy wrote: »

Well accoording to this:
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg50203
Fundsmith T Inc would be considered a different 'class' to Fundsmith T Acc.

They would both have different prices so despite them both being the same fund 'class' they would be considered different revenue 'class' so 30 day rule would not apply.

I can't see anything there that says a different price means "a different revenue class", or anything about funds as opposed to shares in companies. What's the wording behind your conclusion?

In contrast, Fidelity reckons:

If you exchange units or shares of one class of a fund for units or shares
of another class of the same fund this is not generally treated as a
disposal for the purposes of CGT. This will apply to most exchanges
between different AMC share classes of the same fund and/or exchanges
between accumulation and income classes of the same fund or
combinations thereof. However, it is a requirement that the fund assets
and your rights to share in capital and income of those assets are the
same immediately before and immediately after the event (ignoring any
changes as a result of a variation in management charges). Therefore,
exchanges which involve some change in fund assets or your rights, such
as switching from an unhedged class to a hedged class (or vice versa)
are treated as disposals.

https://eumultisiteprod-live-b03cec4375574452b61bdc4e94e331e7-16cd684.s3-eu-west-1.amazonaws.com/filer_public/aa/58/aa58081a-19e9-464f-ab30-92d2c0dd766e/cgt_user_guide.pdf

bowlhead99

EthicsGradient wrote: »

I can't see anything there that says a different price means "a different revenue class", or anything about funds as opposed to shares in companies. What's the wording behind your conclusion?

He's no doubt looking at:

"`shares or securities of a company shall not be treated as being of the same class unless they are so treated by the practice of a recognised stock exchange or would be so treated if dealt with on a recognised stock exchange’."

"A stock exchange lists shares or securities of the same class in a single listing. It is a question of fact whether the rules of a recognised stock exchange would list different types of share separately. If the shares are listed on a recognised stock exchange you should follow the practice of that stock exchange. If the shares are not listed you will need to consider the terms of the shares and apply stock exchange criteria to them. As a general rule, a stock exchange will treat shares as being of different classes, and list them separately, if they have different rights or other features which would affect their value"

Clearly, an income class of shares where each share represents £1000 of underlying net assets would not be treated by the stock exchange as being equivalent to an accumulation class of shares where each share represents £1100 of underlying net assets. No stock exchange panel of decision-makers, or investor, would confuse the two and list them for the same price on a stock exchange or consider them to be equals. If I had 100 Inc shares you would not accept them as a swap in exchange for your 100 Acc shares. They are fundamentally different classes.

Fundsmith equity fund is a UK OEIC (an open-ended investment company) so it is a company which is not listed on a stock exchange. And as mentioned above, "If the shares are not listed you will need to consider the terms of the shares and apply stock exchange criteria to them"

He could also take guidance from CG57709 of HMRC's capital gains manual, which states in respect of unit trusts:

"Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit"

Fundsmith equity fund is a UK OEIC rather than a unit trust but its various Inc and Acc share classes would follow the same principle. Different share classes are different classes; that's not a contentious point.

In contrast, Fidelity reckons:

Yes, Fidelity notes that if you simply exchange one class of shares in a fund for another (rather than selling and buying something else) it can be treated as a reorganization of the fund rather than a disposal.

That's why I noted in the 4th paragraph of my post #9 that to ensure you get a clean break and definitely trigger a disposal for capital gains purposes, you should redeem your shares and take the proceeds as cash, or use the proceeds to subscribe into a different fund altogether, to ensure it is not seen as merely a 'switch' with no disposal.

Once you know the manager has not merely 'switched' or 'exchanged' your existing shares with the same value of shares in a different class of the same fund -and has provided you with a redemption - you are then completely free to buy back in to the alternative share class (ACC instead of INC, or R instead of T, or both), without risk of the purchase being matched against the original sale. They can't be matched for CGT under the 30 day rule if they are different share classes, because they are different financial instruments.

RomfordNavy

EthicsGradient wrote: »

I can't see anything there that says a different price means "a different revenue class", or anything about funds as opposed to shares in companies. What's the wording behind your conclusion?

From https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg50203:

TCGA92/S104(3) provides `shares or securities of a company shall not be treated as being of the same class unless they are so treated by the practice of a recognised stock exchange or would be so treated if dealt with on a recognised stock exchange’.

As a general rule, a stock exchange will treat shares as being of different classes, and list them separately, if they have different rights or other features which would affect their value.

So as Income and Accumulation shares have different features which affect their value they are treated by HMRC as different classes of share.

Chickereeeee

lozzy1965 wrote: »

And without wishing to pry into your personal relationship circumstances, you can sell your investment and buy the same investment for your partner, and vica versa, to maintain the same / similar investments between you and realise a gain.

And I cannot see why you could not then transfer the investment back into your own account, to return to the original situation (less future cap gains liability)

TBC15

Chickereeeee wrote: »

And I cannot see why you could not then transfer the investment back into your own account, to return to the original situation (less future cap gains liability)

This would reduce a £24000 CGT allowance down to £12000 again, why would you want to do this?

EthicsGradient

RomfordNavy wrote: »

So as Income and Accumulation shares have different features which affect their value they are treated by HMRC as different classes of share.

Well, if you think you understand it better than Fidelity, go for it. I'll just warn you that that is talking about shares, traded on a stock exchange, not units that are not regarded by stock exchanges as anything at all. Notice that HMRC is talking about partly-paid shares, rights to fixed dividends, or assets in winding up, not whether the identical income is accumulated or paid out.

EthicsGradient

bowlhead99 wrote: »

Yes, Fidelity notes that if you simply exchange one class of shares in a fund for another (rather than selling and buying something else) it can be treated as a reorganization of the fund rather than a disposal.

That's why I noted in the 4th paragraph of my post #9 that to ensure you get a clean break and definitely trigger a disposal for capital gains purposes, you should redeem your shares and take the proceeds as cash, or use the proceeds to subscribe into a different fund altogether, to ensure it is not seen as merely a 'switch' with no disposal.

Once you know the manager has not merely 'switched' or 'exchanged' your existing shares with the same value of shares in a different class of the same fund -and has provided you with a redemption - you are then completely free to buy back in to the alternative share class (ACC instead of INC, or R instead of T, or both), without risk of the purchase being matched against the original sale. They can't be matched for CGT under the 30 day rule if they are different share classes, because they are different financial instruments.

I think that's extremely optimistic. You're acknowledging that HMRC regards a straight swap as a reorganisation, and thus not a disposal for CG purposes. And they have the 30 day rule to stop people getting an 'artificial' disposal by buying back in before 30 days is up. But you're assuming that they'll say "if it was just change from Acc to Inc we'd call it the same; and we don't count getting cash for just a few days in between as making a difference; but if they do both at the same time, we'll say that suddenly does make a difference".

bowlhead99

EthicsGradient wrote: »

Well, if you think you understand it better than Fidelity, go for it.

I don't think anyone is disputing what Fidelity has to say. Perhaps you missed my post #14 which explained the facts while acknowledging what Fidelity said about exchanging one class of shares or units for another.

I'll just warn you that that is talking about shares, traded on a stock exchange,

It is talking about shares in companies, and it explains that if the shares are not listed (which for example the shares of Fundsmith Equity Fund are not), you would follow whether the rules of a recognised stock exchange would treat them as separate classes if they were so listed.

As it would be a nonsense for a stock exchange to list two shares with fundamentally different asset values and investor rights as being the exact same class (e.g. where one would have an entitlement to a greater share of the company's assets in a winding up, and may have other properties such as exposure to different management fee rates and dividend payment mechanics), it is entirely true that Fundsmith T differs sufficiently from Fundsmith R, or T Inc differs sufficiently from T Acc, for them to be treated as separate classes if they were listed.

not units that are not regarded by stock exchanges as anything at all.

If it is a company share not traded on a stock exchange you should consider how the different classes would be treated by a stock exchange if they *were* traded on a stock exchange. As per comments above.

If it is not a company with shares (Fundsmith Equity Fund and Vanguard Lifestrategy Funds ICVC are companies with shares) but is instead a unit trust issuing units instead of shares, you would follow HMRC's guidance at CG57709 as I mentioned in the earlier post, which says helpfully, "Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit"
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709
(In my earlier post I made a typo and said that quote was from CG50203, but meant CG57709, now corrected)

Notice that HMRC is talking about partly-paid shares, rights to fixed dividends, or assets in winding up, not whether the identical income is accumulated or paid out.

It is giving examples of "different rights or other features which would affect their value".

Do you feel that despite the fact that (e.g.)

- an INC share carries the right to a payout worth £100 if the fund were to liquidate its net assets tomorrow, and an expectation of £2 of income allocation paid out in cash this year;

- an ACC share carries the right to a payout worth £125 if the fund were to liquidate its net assets tomorrow and an expectation of £2.50 of income to be retained in the fund his year;

... those two types of share do NOT have "different rights or other features which would affect their value" ?

It seems to me and most other people that they are fundamentally different. Market participants would never treat them as equivalent and expect them to be listed under one class on a stock exchange. If they were freely traded on a stock exchange, and you placed an order to buy 100 shares, would you really not mind which shares you received from the seller for the price you had agreed?

bowlhead99

EthicsGradient wrote: »

I think that's extremely optimistic. You're acknowledging that HMRC regards a straight swap as a reorganisation, and thus not a disposal for CG purposes.

A company can reorganize its share capital structure in a variety of circumstances and the role of tax legislation is not to obstruct legitimate commercial/administrative objectives or to make people do CGT calcs unnecessarily when they are not deliberately exiting their investments.

For example, with consent of the investors, Lloyds Bank could convert all its preference shares to a different number of ordinary shares. As a former preference share investor, you would then own ordinary shares instead of preference shares but HMRC would accept that the amount you had paid for the preference shares was your 'allowable expenditure' for the ordinary shares which you now own, post-restructure. You haven't made a disposal until you exit the ordinary shares.

A similar mechanic allows the operator of an investment fund to restructure a load of its share capital and say that for example all the shares which used to be Class R Retail holdings with a 1.5% management fee that afforded a kickback to a platform and IFA, would be reissued as Class C Clean holdings with a 0.75% management fee and no kickback, and the same basic value of underlying asset exposure to substantially the same assets. In such a case, it's not treated as a disposal but a reorganization - the requirement for longstanding holders to potentially pay a boatload of CGT as a result of the fund manager's administrative change, is avoided.

Following additional HMRC rules finalised around the time of the FCA's Retail Distribution Review/ Platform Review, it was made explicit that fund managers wouldn't actually have to convert more than x% of a class of investors all at once for it to qualify as a reorganization and avoid a disposal for CGT purposes. They could instead allow investors to request a switch piecemeal - in their own time and at their own convenience.

As long as the change was between substantially similar share classes in the same sub-fund of the OEIC (eg UK Equity R to UK Equity C, or UK Equity C Inc to UK Equity C Acc; but not UK Equity C Inc to Global Strategic Bond C Acc), they would grant the 'share exchange is treated like a capital reorganisation' analogy.

So, if you participate in an exchange of shares arranged by/sanctioned by the fund manager (as described by Fidelity in the text describing the consequences of their switch process) you can get. 'exchange of shares is a reorganization' treatment and your new shares inherit the acquisition cost of the old ones.

They have explicit rules and regulations, which I've quoted on this board before, to ensure that a person is able to switch from one class to another without the unwanted CGT consequences that could ordinarily go hand in hand with exiting one position in one financial instrument and acquiring another different financial instrument. Because R and C, or Inc and Acc, are indeed different financial instruments and not usually eligible to be matched together in the 30 day rule etc. But as long as it's a 'straight swap' as you say, and the various conditions are met, they will allow it not to be an exit.

However, if it is not a straight swap (i.e. you definitely exited and bought something else with the proceeds), then you have created a CGT disposal event and can't say you want it to somehow be an organisation of the fund's share capital (which would have been your only way of it not being seen as an exit/disposal).

The 30 day rule is about matching sales of a financial instrument with a later purchase of the same financial instrument. As C Inc shares are not the same share class as R Acc shares, they are not the same instrument and can't be matched under the anti- bed'n,'breakfasting rules, despite the shares being issued by the same company or fund. Just because you *could* have exchanged one class for another without it being an exit, (but didn't choose to use that opportunity) it doesn't mean that once you have redeemed your position and exited the fund you will be able to later buy back into a different class of the fund shares and claim you were 'reorganised'.

So
1) if you switch instead of redeeming, it is not an exit

2) once you have redeemed instead of switched, and are holding your exit proceeds in your hand or have already reinvested them elsewhere:
a) you can go back into the same class under the 30 day rule OR
b) you can go back into a different class and the 30 day rule does not come into play because you are not re-buying the same class of shares in the same entity.