Switching index funds - CGT - Have I got this right?

ChilliBob

Makes perfect sense now! Ha ha cheers 

AnotherJoe

ChilliBob said:

Cheers, I think it was just the word in a financial sense.
"Crystallization is the selling of a security to trigger capital gains or losses. Once there is a capital gain or loss, investment tax applies to the proceeds"
It's basically what I thought.

It's a good point which you make on the last one about not needing to change your strategy - I'd not necessarily thought about even buying the same thing effectively - I guess it can't be *the same thing* though otherwise there's some rule about 30 days or something isn't there?

I'm aware this strays into a different direction, but if one wanted to pool ones CGT allowance with a wife or husband is it best if they hold the asset from the start, or that you transfer then crystalise or what? - I'm not in that position yet, (due to covid meaning I've had to move my wedding, third time lucky!), but it's good to plan from the outset me thinks.

It pretty much can be the same thing. Sell Acme Corps S&P500 Index and buy Beta Corps S&P500 index.

ANGLICANPAT

ChilliBob said:

Guys, 
Something I want to make sure I have right, in this hypothetical example:

GIA account (not ISA), £500,000 in it
Invested into one fund - lets say VLS 100, HSBC Global Tracker whatever
Invested for one year
Let's assume it's now worth 515,000 (3% increase)
Saw you want to switch to a comparable fund (perhaps the above fund has had an increase in costs coupled with a poor tracking error figure or something)

Does this mean you have to:
1. Sell the holding (close to the new price)
2. Buy the new holding (which will probably be a similar price of the sale if it's a similar index
3. Declare a gain of 15,000, assuming this is your *only* gain, you'd pay tax on 2.7k or so £270 or 540 depending on what tax bracket you fit into.
So in essence you need to decide if the move to the new fund will be worth the £270/540 cost.

I assume that the only ways around this are:
1. Try to have smaller holdings - so instead of 500,000 into one fund it could sit in 5 funds (downside = 5x trading cost, but assuming fees were similar, that's about it)
2. Try to only sell part of a holding before buying a new fund to release less of the gains at once if the gain is significant enough to trigger CGT

I just want to make sure I have understood this and some kind of 'swap' or something on a platform isn't a different way to do this. I can't think how there can be any way around it as you could just make a gain, flog the shares, buy something cheap, obvs you couldn't do that without cgt (assuming it was of the level to trigger it of course)

Point 1 in the second list .  Im not sure I understand why  smaller holdings  help avoid  CGT  -   I thought for the tax year you would have to add all  profits together from  2 or 20 funds   and pay CGT  at appropriate rate (after allowance)  on any amount over the total profits they add up to. ? 

ANGLICANPAT

Sorry that reads badly at the end and the  alter option disappeared.  I meant  pay CGT at the appropriate rate after allowance, on  the total profits . 

ChilliBob

You're correct, I was thinking if you wanted to switch from one fund to another. An unlikely case with a good choice and passive investment, but say the tracking error crept up and you wanted to ditch.. If you'd find it much easier if it was a smaller holding - you could probably sell the whole lot, not attract CGT and buy something else. 
So in essence perhaps you buy four trackers with similar fees and structure, means if you want to switch from one to something else it's easier than if you had all your eggs in one basket. 

noclaf

CGT still confuses me especially regarding CGT reporting obligations to HMRC.
So let's assume I have a single unwrapped fund that rises £11k during a particular tax year. I then sell units of my fund to realise the £11k profit. The £11k profit is then transferred to my bank account and from there I transfer it to my S&SISA and invest it into a different fund. The £11k is below is the annual CGT threshold so no CGT to pay but do I still need to 'report' it to HMRC?

TBC15

If the value of the sale was above £49200 (4 x CGT allowance) and you are subject to self assessment you must include the information in your self assessment.