Sell & re-buy to crystalise CGT

EthicsGradient

masonic said:

EthicsGradient said:

No. Some forum members reckon it exists, but without any evidence that HMRC thinks that way. That does not mean that "it would seem this avenue exists".

I agree some forum members reckon it exists, and they have posted information from HMRC supporting their view. You have attempted to rebut that view through selective quoting of some information from Fidelity. The bit you left out was:

"Where exchange is undertaken at the behest of you through a ‘switch’ process (that is a sell transaction followed by a corresponding buy transaction) it must involve only a single instruction from you and there must be no time interval between the two events beyond the minimum ordinarily necessary to achieve the transaction."

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

Does that perhaps substantially change the meaning of the part you quoted, such that it does not apply to the sale of an investment, followed by a purchase of a different unit class of that investment, made as two separate instructions? I see @bowlhead99 has already pointed this out to you, but it's worth re-emphasising the point, since you might have missed it. The consequence of the above quoted text is that Fidelity can be considered to agree that a fund switch involving two instructions from the customer does constitute a disposal, and Fidelity cannot be counted among those who agree with your view.

The second attempt you have made to rebut the view is the quoted text from FT Adviser, where Danny Cox opines on how things ought to be, rather than how they actually are. As such, it cannot be stated that HL has expressed an opinion on whether or not, today, such switches between unit classes constitutes a disposal.

Unless you have quotes from other professionals, there seems to be no disagreement from the professionals.

So you'll forgive me for maintaining my position that "it would seem this avenue exists" on the basis of the information published by HMRC, and the only way to be certain (if you are in any doubt regarding the interpretation of this information) would be to ask HMRC to clarify their position.

No, that doesn't substantially change the meaning; it's for " switching from an unhedged class to a hedged class (or vice versa) ", rather than the earlier "exchanges between accumulation and income classes of the same fund" which it says "is is not generally treated as a disposal". And saying that because the FT Adviser is an opinion (no, it's not 'how things ought to be, rather than how they actually are", it's what "should not be considered", ie you would be making a mistake if you considered it that way; they confirm that by saying "in our view, transferring from income to accumulation units (or vice versa) of the same unit trust does not create a disposal"), then you can't even say HL has expressed an opinion is just a complete non sequitur.

If you don't change anything at all, it's not a disposal. If you sell, and then repurchase the same thing 15 days later, it's not a disposal. If you switch between income and accumulation, it's not a disposal. There is no reason to think that if you do those 2 things,  repurchasing within 15 days, but ending up with the different distribution status, which each mean "it's not a disposal", then it suddenly becomes a disposal. These aren't things where you add up bits that make it "a little bit of a disposal", and when you've got enough, then you can round it up and call it a disposal.

masonic

EthicsGradient said:

masonic said:

EthicsGradient said:

No. Some forum members reckon it exists, but without any evidence that HMRC thinks that way. That does not mean that "it would seem this avenue exists".

I agree some forum members reckon it exists, and they have posted information from HMRC supporting their view. You have attempted to rebut that view through selective quoting of some information from Fidelity. The bit you left out was:

"Where exchange is undertaken at the behest of you through a ‘switch’ process (that is a sell transaction followed by a corresponding buy transaction) it must involve only a single instruction from you and there must be no time interval between the two events beyond the minimum ordinarily necessary to achieve the transaction."

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

Does that perhaps substantially change the meaning of the part you quoted, such that it does not apply to the sale of an investment, followed by a purchase of a different unit class of that investment, made as two separate instructions? I see @bowlhead99 has already pointed this out to you, but it's worth re-emphasising the point, since you might have missed it. The consequence of the above quoted text is that Fidelity can be considered to agree that a fund switch involving two instructions from the customer does constitute a disposal, and Fidelity cannot be counted among those who agree with your view.

The second attempt you have made to rebut the view is the quoted text from FT Adviser, where Danny Cox opines on how things ought to be, rather than how they actually are. As such, it cannot be stated that HL has expressed an opinion on whether or not, today, such switches between unit classes constitutes a disposal.

Unless you have quotes from other professionals, there seems to be no disagreement from the professionals.

So you'll forgive me for maintaining my position that "it would seem this avenue exists" on the basis of the information published by HMRC, and the only way to be certain (if you are in any doubt regarding the interpretation of this information) would be to ask HMRC to clarify their position.

No, that doesn't substantially change the meaning; it's for " switching from an unhedged class to a hedged class (or vice versa) ", rather than the earlier "exchanges between accumulation and income classes of the same fund" which it says "is is not generally treated as a disposal".

Here is the text in full:

"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. Where exchange is undertaken at the behest of you through a ‘switch’ process (that is a sell transaction followed by a corresponding buy transaction) it must involve only a single instruction from you and there must be no time interval between the two events beyond the minimum ordinarily necessary to achieve the transaction."

I've highlighted the sentence regarding moving from unhedged to hedged share classes being treated as a disposal. This is an unqualified statement, it would be treated as a disposal under any circumstances. It therefore must be the case that the subsequent sentence does not apply to previous sentence, but the overall subject of that paragraph, viz that 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, and limits the generality of that statement to the situation in which it ... involve[s] only a single instruction from you and there must be no time interval between the two events beyond the minimum ordinarily necessary to achieve the transaction.

If the above were not the correct interpretation, and the bit about switching from unhedged to hedged counting as a disposal was qualified by the final sentence, it would mean that switches from an unhedged to hedged class would only be treated as a disposal if they involve only a single instruction from you and there must be no time interval between the two events beyond the minimum ordinarily necessary to achieve the transaction. I'm sure you don't think that is the case.

EthicsGradient said:

And saying that because the FT Adviser is an opinion (no, it's not 'how things ought to be, rather than how they actually are", it's what "should not be considered", ie you would be making a mistake if you considered it that way; they confirm that by saying "in our view, transferring from income to accumulation units (or vice versa) of the same unit trust does not create a disposal"), then you can't even say HL has expressed an opinion is just a complete non sequitur.

That is not my interpretation of the text. My interpretation is that Danny Cox is making the point that in HL's view, "As the units are treated exactly the same for other tax purposes, they can also be considered identical for the bed and breakfast rules". In other words, he has taken a premise and made an argument based in logic, not in fact. What matters, as you have agreed, is what happens in fact. Danny Cox has not stated anywhere in the article that HMRC treats the units as identical in practice. It's worth mentioning that HL has previously misunderstood the application of tax rules, taken on HMRC in court and ultimately lost.

Since we've previously agreed that it makes no difference what anyone other than HMRC says, hopefully there is no need to further draw out our disagreement over the interpretation of these professional opinions.

As I have stated above, I have an open mind as to whether selling one unit class and then buying another within 30 days constitutes a disposal, but continue to maintain my position that "it would seem this avenue exists", and can only reiterate my previous suggestion that the only way to be certain (if you are in any doubt about the interpretation of the information already provided by HMRC regarding this subject) would be to ask HMRC for clarification. I fail to see what you could find disagreeable about that position.

bowlhead99

EthicsGradient said:

If you don't change anything at all, it's not a disposal. 

Agreed!

 If you sell, and then repurchase the same thing 15 days later, it's not a disposal

Well, it is a disposal of what you bought 15 days later rather what you bought in the past. There is still a disposal, but the sale is matched to the later purchase of the same share rather than the earlier purchase of the shares held at the point of sale. But for simplicity,  yes , if what you buy is literally the same thing as what you sold, <30 days earlier they will be matched under the 30 day matching rules, and you will be treated like you still have the original shares and have not disposed of those original shares.

Importantly, this is only in the case that you 'repurchase the same thing', and NOT if you 'purchase a similar-but-different thing', like a different class of shares. I will return to that point with a reminder of the HMRC references later.

If you switch between income and accumulation, it's not a disposal.

Agreed that if it is processed by the manager as a conversion or switch (as distinct from being processed as a sell and later buy with the proceeds of one being  eventually used to subscribe for another), and the two classes are exposed to substantially the same underlying assets with only administrative difference between them (such as management fee rate difference or div payout vs div accumulation), it can be treated as a share-for-share exchange with no disposal of assets taking place.

This takes advantage of the special 'reorganisation' provisions of S127  of TCGA where both the old shares/units and new shares/units participate in the same scheme property (e.g. the ABCXYZ North American Equity Sub-Fund within the ABCXYZ Investment Funds plc umbrella fund) and merely have administrative differences between how they participate (e.g. management fee rates or inc vs acc), rather then a different strategy (e.g. hedged vs unhedged) ; the latter will have different underlying assets (derivatives or forward contracts creating different economic exposures) and so won't be only participating in the same scheme property.

In HMRC's manual, https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57755 confirms that treatment of unit trust units with their different classes is analagous to treatment of OEIC shares with their different classes, i.e. S127 can apply if an investor switches between them. If the criteria are met, the switch would not be considered a disposal.

The criteria for how an exchange of one type of shares for another by an investor in a collective investment scheme can be accepted as being the same as a reconstruction of the scheme's share capital - just like the reorganisation of share capital or conversion of securities in a regular company would be treated under S127 - is set out in the clarifying legislation issued round about the time of the Retail Distribution Review and Platform Review.

This was a hot topic when funds were looking to flip people from one share class to another en masse (e.g. bundled charging to unbundled clean class) or individuals wanted to move class on an ad hoc basis rather than wait for a mandatory switch for all holders at once. See the collective investment schemes(....exchanges, mergers, schemes of reconstruction etc) regs:  ...) http://www.legislation.gov.uk/uksi/2013/1400/regulation/11/made?view=plain 

You can see from that, that it's possible to flip between units and keep £1000 exposure to the same underlying assets at a valuation point by the fund manager providing you with 1000  x £103 Acc shares in exchange for your 1030  x £100 Inc shares. If that's what happens, you can have 'I haven't made a disposal of my holdings' treatment. It is clear from the guidance and the regulations that this is allowed to be the case.

There is no reason to think that if you do those 2 things,  repurchasing within 15 days, but ending up with the different distribution status, which each mean "it's not a disposal", then it suddenly becomes a disposal. These aren't things where you add up bits that make it "a little bit of a disposal", and when you've got enough, then you can round it up and call it a disposal.

"Repurchasing within 15 days is not a disposal" is only true in the very specific situation where you repurchase the exact same financial instrument as you disposed <30 days earlier, allowing it to be matched. That rule cannot kick in when you buy back a different financial instrument, such as a different company or fund, or a different share class of the same company or fund.

"Switching from one class to another is not a disposal" is only true in the very specific situation where the fund manager directly exchanges your holdings of a class of units in his collective investment scheme for the same value of holding of a different class of units with exposure to the same pool of underlying scheme property at the same valuation point, and it can be claimed that the scheme was 'reorganised' as recognised by S127 of The Chargeable Gains Act '92. That rule cannot kick in when you do not participate in a direct share-for-share or unit-for-unit switch or conversion and instead you redeem your position and take cash off somewhere else or buy a different unrelated pool of assets in a different fund or sub-fund.

The failure of logic you are making is to say that you think that by selling out and later buying back into a different class, you are 'basically' ending up in the same place as if you had participated in an exchange of class of units (which would not be a disposal) and then sold and bought back the same class of units (which would not be a disposal), so you think that HMRC should not see that there was a disposal.  However, that's fundamentally flawed because you don't meet *either* of the criteria for the activities to not be seen as a disposal.

1) Did you exchange one class of share for another class of shares in the same pool of assets, in which case you can say you have not disposed?  NO, I did NOT exchange one class of shares for another so cannot claim exchange/reorganisation treatment under S127 of TCGA '92. I sold out for cash and a disposal was achieved. I missed the opportunity to claim that I'd exchanged the shares instead of disposing of them.

2) Did you sell and later repurchase the same financial instrument in which case the sale and later purchase can be matched and you can say that you have not disposed of the earlier holding? NO, I did NOT sell and repurchase the same financial instrument so cannot say I 'bought them back' within the 30 days. My purchase was of a different class of shares, so a disposal was achieved. I missed the opportunity to claim I bought back the shares instead of properly disposing of them.

In relation to the 30 day rule only relating to the exact same financial instrument - the same class of shares:

• Note that from the guidance linked earlier in the thread (being HMRC guidance, rather than mere advisor suggestion): "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."

• And note that for two shares to be treated as the same class of share by the practice of a recognised stock exchange, the two shares would need to have the same rights and other features so that their value was the same. Because (again, as noted by HMRC in their manuals previously linked), "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".  An income share of a collective investment scheme with rights to £100 of NAV on a winding up would obviously be listed separately on a stock exchange from an accumulation share with rights to £103 of NAV on a winding up: because they have different rights, which affect their value. No market participant striking a trade to purchase a share would be indifferent to whether it gave him rights to £103 or £100. 

• Note also that in relation to units of collective investment schemes structured as unit trusts, which are not shares, HMRC conveniently notes at   https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg57709 : "Many unit trusts offer accumulation units and income units. These should be treated as different classes of unit". 

So knowing as we do:

• - the HMRC 30-day rule where a buy back is matched with the disposal up to 30 days prior if it is the same financial instrument,

• - and that income and accumulation shares of an OEIC sub-fund are NOT treated as the same financial instrument because they are not the same class of share (because they would not be treated as the same class of shares if they were dealt with on a recognised stock exchange)

• - and that income and accumulation units of a unit trust are NOT treated as the same financial instrument because they are not the same class of unit (because HMRC explicitly tells us that these "should be treated as different classes of unit")

...it is pretty categoric that when you sell and later purchase a different share class 15 days later it IS a disposal of your old assets (because the sale of those old assets cannot be matched with the 15-day later purchase because those new assets are not the same as the old assets you had once owned).  HMRCs descriptions of what is meant by a different class of shares in relation to disposals and potential matching within pools or 30-day rules etc are very clear and unambiguous.  The cost of purchase of one financial instrument can't be matched with the sale of a different financial instrument.  The only time you can change classes without disposing is where the conditions are met for 'reorganisation' rules to apply. Those rules only apply where there is no actual sale, only a direct exchange of class A for class B, as provided for in the published law and regulation on the topic (being s97 TCGA 1992, and chapter 4 s103 of TCIS(TTFEMSR) 2013).

bowlhead99

masonic said:

As I have stated above, I have an open mind as to whether selling one unit class and then buying another within 30 days constitutes a disposal,

I don't have an open mind on the topic because HMRC's guidance is clear in the “bed and breakfast” rule TCGA92/S106A(5) and (5A) (summarised at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51560#IDATR33F) that:

Disposals must be identified with acquisitions of shares

-of the same class, (see CG50203 which has been linked and quoted extensively earlier and also CG57709 linked by me again above)

-acquired by the same person in the same capacity, and

-acquired within the 30 days after the disposal.

 If you sell Acc class shares and the 'rebuy' is not of Acc class shares but is instead Inc class shares, the  very first of the three tests within the "must be same: 'class', 'person and capacity',and '30 day period' ", is failed. HMRC have given detailed descriptions of what they mean by a class both generally for companies (which includes OEICs) and explicitly for Unit Trusts, and it is absolutely clear that Acc and Inc are different classes.

It's all very well to be polite to someone to avoid an argument and say you will sit on the fence but feel that it seems the avenue exists, check with HMRC. But when the facts are known it is fine to be bold and say that HMRC are clear on it in their own guidance.

The subtle point which is worth reiterating each time the point comes up is that this is basically a useful 'loophole' used by people who have done their research and are comfortable with their findings. Like all good loopholes that some pay £££ to tax advisors to find for them, we do not do the consumers - who would like to use these loopholes - any favours if we shout from the rooftops that the loophole exists and we recommend people use it. 

If Martin's Minions publish a 'year end tax guide' as consumer champions and send a bulletin to 10 million people saying "...as tax year end is coming up, don't forget to use rather than lose your annual exemption by flipping your Inc funds to Acc after spending a day in cash or in another fund inbetween, and don't worry you can flip back the opposite direction with the same technique later..." ; then one can imagine that some bright spark at HMRC or treasury would think that they can put that on the to-do list as a loophole to consider eventually closing through some tighter anti-avoidance legislation. when some opportunity presents itself.  

That goes some way to explain why tax advisors (who want to be paid for solutions) do not tout it as a free and effective solution on their public websites, and why some groups being interviewed in the media will pretend it doesn't exist or that the situation is unclear so best not to try it. By engaging in robust debate to tell people in no uncertain terms that it is categorically fine to do, we risk killing the golden goose. So while I have explained it here with detailed references on threads every year or two, and sometimes needed to explain several different ways until people comprehend the points, I don't generally continue to argue indefinitely to draw out the threads for post upon posts.  

If people want to find it difficult to believe that such a simple solution exists that has not been closed down, and that they think it is not prudent to try it in case it is wrong, they are welcome to their opinion. People are free to be wrong about stuff if they do not want to take time to read the research and legislation and only want to conduct superficial Google searches and then say 'seems like there's nothing definitive'. There is something definitive when it comes to tax: 6-10,000 pages of substantive direct and indirect UK tax legislation, plus thousands of pages-worth of footnotes and non-statutory material, case law and guidance notes. In this instance it's relatively easy to find HMRC's internal Capital Gains Manual and if you know how to read and interpret such manuals, form a definitive conclusion which is not generally contradicted by any authoritative articles published by practitioners.

Or you could sit on the fence so as not to hurt anyone's feelings and avoid getting stuck in an online spat

masonic

bowlhead99 said:

It's all very well to be polite to someone to avoid an argument and say you will sit on the fence but feel that it seems the avenue exists, check with HMRC. But when the facts are known it is fine to be bold and say that HMRC are clear on it in their own guidance.

<snip>
Or you could sit on the fence so as not to hurt anyone's feelings and avoid getting stuck in an online spat

That's not what I was doing at all. The earlier posts made a convincing but not compelling case that this method of disposal was permitted. If I'm guilty of anything, it is being too lazy to look into it further because it is not an issue that affects me personally, having only one unwrapped holding, which is not available in both Inc and Acc units.

I did not let my remaining uncertainty prevent me from getting stuck into the nonsense being posted in the defence of an opposing view and I think I thoroughly and effectively demolished the case being made that the professionals disagree. If I wanted to sit on the fence and avoid getting stuck in an online spat, I would have done so by refraining from posting.

Your subsequent post has made it irrefutable that this method of disposal is permitted, so no further discussion of this issue need take place.