Capital gains washing out the base cost on index funds to utilise the personal allowance every year

NottinghamMan

Capital gains washing out the base cost on index funds to utilise the personal allowance every year so in 10 years, I have a higher base cost for when start withdrawing.
If I'd bought unit trust index funds for 300k and 3 years later it's worth 400k, what amount do I have to sell to just use the Capital Gains personal allowance ie. Is it I can only sell £12,300 for 1 year? Doing that to reset the base cost.
And what would be my new base cost the next year if I din't re-buy the funds after 30 days?
What would be my new base cost if I did re-buy the funds after the 30 days?
Or is it if I only sell 1/4 of the whole funds ie. 100k, I only then pay tax on 1/4 of that 100k ie. 25k minus £12300 personal allowance means I pay 10% of £12700 left is £1270 is that right?
So then how do we work backwards to get it to only selling enough to use the personal allowance for Capital Gains £12300?

Is the base cost only going to go up by £12300 if I don't reset? So in 10 years, will be 10 x £12300 = £123,000, so £12,300 tax at that point?
If 20% Tax, Resetting each year would be worth it in 10 years.

I will probably be adding to these funds about 100k each year as well if that makes a difference to your answers.

eskbanker

At any given point in time, you have x units at a total purchase cost of £y, and the average cost for CGT purchases is therefore £y/x.

Selling units doesn't affect that average cost, which is only adjusted after making purchases, so you can't make a (partial) sale to reset the average cost, but if you sell the lot and repurchase after more than 30 days then that has the effect of resetting.

If you want to use up a year's CGT allowance of £12,300 worth of gains, then you need to identify the gain per unit (current price minus £y/x) and divide £12,300 by that number to give the number of units to sell.

https://www.gov.uk/capital-gains-tax
https://www.gov.uk/tax-sell-shares

soulsaver

You sell enough to realise a gain equal to your allowance. You only 'crystallise' the gain when you sell. 
In your  example if you sold  £49200  3 parts (x  £12300) £36900 would be made up of cost - and 1 part would be crystallised gain, £12300.

So if you sold £100K  £49.2k would be untaxed and the remaining £50.8k would generate a crystallised gain of £12.7k liable to CGT.

If you didn't buy again, base cost per unit remains the same (or as Esk says avg cost remains the same).

eskbanker

soulsaver said:

the remaining £50.8k would generate a crystallised gain of £16.93k liable to CGT

Surely a chargeable gain of £12,700 (i.e. quarter of the sale proceeds)?

NottinghamMan

eskbanker said:

At any given point in time, you have x units at a total purchase cost of £y, and the average cost for CGT purchases is therefore £y/x.

Selling units doesn't affect that average cost, which is only adjusted after making purchases, so you can't make a (partial) sale to reset the average cost, but if you sell the lot and repurchase after more than 30 days then that has the effect of resetting.

If you want to use up a year's CGT allowance of £12,300 worth of gains, then you need to identify the gain per unit (current price minus £y/x) and divide £12,300 by that number to give the number of units to sell.

https://www.gov.uk/capital-gains-tax
https://www.gov.uk/tax-sell-shares

Right, So it's only the re-buying that resets the base cost then.
Vanguard do give me an average cost (Initial phone call accountant said this is good, as that part done for them), today £195.98
Todays price to sell is £217.11, so my gain per unit would be £21.13 have I got that right?
Now this is where I'm definitely lost, £12,300 divided by Gain per unit £21.13 is 582.11 units is that correct? Multiplied by £217.11 unit price is £126,318 is that correct for me to sell?
Cause to be exact total cost is £319,000, and todays value is £353,384. So I'd be selling more than what the actual gain is so far?
If that is correct, & I buy back £126,318 (or is it exact amount of units I buy back?) after 30 days, what would be my Base cost then?
Excuse my thickness, u two are obviously used to this formula.
I just want some Capital Gains accountant (if anyone knows anyone or any calculator site on internet) to work this out for me once a year what I need to sell & buy back to just use up the personal allowance, so every year, I have a higher base cost for when I come to sell in 10 years or whatever.

NottinghamMan

soulsaver said:

You sell enough to realise a gain equal to your allowance. You only 'crystallise' the gain when you sell. 
In your  example if you sold  £49200  3 parts (x  £12300) £36900 would be made up of cost - and 1 part would be crystallised gain, £12300.

So if you sold £100K  £49.2k would be untaxed and the remaining £50.8k would generate a crystallised gain of £16.93k liable to CGT.

If you didn't buy again, base cost per unit remains the same (or as Esk says avg cost remains the same).

Yes, someone else mentioned this £49.200 figure. So I'm gathering I NEED the accountant to do this properly every year, as this could lead to much higher base cost in years to come when withdrawing.
Where do u get the £16.93k from?
U two obviously know what u ruddy doing more than the non specialist accountants. But excuse me for being lost.

soulsaver

eskbanker said:

soulsaver said:

the remaining £50.8k would generate a crystallised gain of £16.93k liable to CGT

Surely a chargeable gain of £12,700 (i.e. quarter of the sale proceeds)?

Correct - just making sure people were watching...
Edited

soulsaver

NottinghamMan said:

soulsaver said:

You sell enough to realise a gain equal to your allowance. You only 'crystallise' the gain when you sell. 
In your  example if you sold  £49200  3 parts (x  £12300) £36900 would be made up of cost - and 1 part would be crystallised gain, £12300.

So if you sold £100K  £49.2k would be untaxed and the remaining £50.8k would generate a crystallised gain of £16.93k liable to CGT.

If you didn't buy again, base cost per unit remains the same (or as Esk says avg cost remains the same).

Yes, someone else mentioned this £49.200 figure. So I'm gathering I NEED the accountant to do this properly every year, as this could lead to much higher base cost in years to come when withdrawing.
Where do u get the £16.93k from?
U two obviously know what u ruddy doing more than the non specialist accountants. But excuse me for being lost.

Sorry got 1/3 stuck in my head. As Esk says £12.7k subject to CGT on the £50.8k balance

ChilliBob

I'd have thought this was based on transactions in the account?

My theoretical example
Year one: 100k investment at £10 per unit. 
Year two: price increased to £20 per unit.
Gain is £10 per share. Total gain is 100k.
For ease of maths assume you sell 10% of the shares. You wait 31 days then repurchase the shares. Assume the price doesn't change.
So you have 90% of the shares at £10, and 10% of the shares at £20.

In a years time if they are £30 surely it's:
90% of shares =£20 gain per share.
10% of shares =£10 gain per share
Sum these up and sell some shares to use the allowance again.

80% shares are purchase price £10, 10% are are at £20, and 10% are at 30 etc. 

Also, as per Monevator article today you need to consider dividend reinvestment and minus this from the gain of something, but let's assume in the above there are no dividends, just increase in share price. 

I suspect I have the wrong end of the stick, but obviously it can't be that selling 10% of a holding at £10 per share and buying it back at £30 a share means 100% of the shares are, valued at £30 for cgt! 

eskbanker

NottinghamMan said:

Right, So it's only the re-buying that resets the base cost then.
Yes.

Vanguard do give me an average cost (Initial phone call accountant said this is good, as that part done for them), today £195.98
Todays price to sell is £217.11, so my gain per unit would be £21.13 have I got that right?
Yes.

Now this is where I'm definitely lost, £12,300 divided by Gain per unit £21.13 is 582.11 units is that correct?
Yes.

Multiplied by £217.11 unit price is £126,318 is that correct for me to sell?
I make it £126,382 but close enough....

Cause to be exact total cost is £319,000, and todays value is £353,384. So I'd be selling more than what the actual gain is so far?
Yes, by definition gain per unit must be less than the unit value, so to crystallise a gain you need to sell a higher value.

If that is correct, & I buy back £126,318 (or is it exact amount of units I buy back?) after 30 days, what would be my Base cost then?
No way of telling without knowing how many units you get for that.  If you paid the same £217.11 to buy them back, then you'd have the same 1,627.7 units but at a total cost of £331,300 (the original 1,045.6 units @ £195.98 + the £126,382), giving a revised average unit cost of £203.54.

Answers inline above....

Perhaps worth noting that the 30-day rule only applies if you repurchase exactly the same investment - you do have the option to buy something similar but slightly different, e.g. Inc units instead of Acc or vice versa, to avoid being out of the market for 30 days.

eskbanker

ChilliBob said:

My theoretical example
Year one: 100k investment at £10 per unit. 
Year two: price increased to £20 per unit.
Gain is £10 per share. Total gain is 100k.
For ease of maths assume you sell 10% of the shares. You wait 31 days then repurchase the shares. Assume the price doesn't change.
So you have 90% of the shares at £10, and 10% of the shares at £20.

At this point, you have 10,000 shares for which you've paid £110,000, so you have a pool of shares all with an average cost of £11.

ChilliBob said:

In a years time if they are £30 surely it's:
90% of shares =£20 gain per share.
10% of shares =£10 gain per share
Sum these up and sell some shares to use the allowance again.

80% shares are purchase price £10, 10% are are at £20, and 10% are at 30 etc. 

No - as above, the values are pooled, so the average cost for all of them is £11, there's no concept of FIFO, etc, and so any sales at this point will involve a gain of £19 each.