Capital Gains on Index Funds

alongtimetogoyet

Can someone please tell me how CGT would work in the scenario below. 

I plan to invest £100 a month in an index fund (acc) over the long term, probably around 15 years or so. At some point I will cash it in (unless there is a better option) and this will be given to my son. I think I understand the basic principles of CGT but am unsure of how the original cost would be calculated given that units are being purchased at different prices. 

For illustrative purposes let's say I had invested a total of £18k but the fund had a value of £30k. How is the taxable amount calculated. Is it as simple as saying that the gain is £12k.

In case anyone asks, using ISAs is not an option.

Many thanks.

masonic

If you invest in an acc fund, then the capital gain will be less than the total gain because of some of the gain was dividend income. I would always suggest going for inc units to simplify the maths and retain the link between your total gain and capital gain.

Obviously it is very simple if you sell your entire holding at once, but in practice you may be selling gradually and perhaps buying in between sales. For this you just need to keep track of your average acquisition price per unit (including any allowable costs) and use this figure as the base when calculating the gain each time you sell.

EthicsGradient

masonic said:

If you invest in an acc fund, then the capital gain will be less than the total gain because of some of the gain was dividend income. I would always suggest going for inc units to simplify the maths and retain the link between your total gain and capital gain.

Obviously it is very simple if you sell your entire holding at once, but in practice you may be selling gradually and perhaps buying in between sales. For this you just need to keep track of your average acquisition price per unit (including any allowable costs) and use this figure as the base when calculating the gain each time you sell.

Although, as far as simplicity goes, if this is an OIEC, and you regularly buy income units, then the "cash" sent to you (or credited to your account) will partly be income, and partly equalisation (for a lump sum payment, this will only happen once; for regular purchases, it'll happen all the time). This equalisation should be subtracted from the cost basis - see eg https://www.hl.co.uk/help/tax-information/investment-reports/cost-figures/why-is-the-cost-figure-slightly-less-than-the-amount-i-invested-what-is-equalisation .

masonic

EthicsGradient said:

masonic said:

If you invest in an acc fund, then the capital gain will be less than the total gain because of some of the gain was dividend income. I would always suggest going for inc units to simplify the maths and retain the link between your total gain and capital gain.

Obviously it is very simple if you sell your entire holding at once, but in practice you may be selling gradually and perhaps buying in between sales. For this you just need to keep track of your average acquisition price per unit (including any allowable costs) and use this figure as the base when calculating the gain each time you sell.

Although, as far as simplicity goes, if this is an OIEC, and you regularly buy income units, then the "cash" sent to you (or credited to your account) will partly be income, and partly equalisation (for a lump sum payment, this will only happen once; for regular purchases, it'll happen all the time). This equalisation should be subtracted from the cost basis - see eg https://www.hl.co.uk/help/tax-information/investment-reports/cost-figures/why-is-the-cost-figure-slightly-less-than-the-amount-i-invested-what-is-equalisation .

Yes, good point, and for an ETF, while you don't have this added complexity, you do have excess reportable income to account for.

billyboy

If you can set up an ISA to pay in monthly payments, then there are no tax implications and nothing to work out. If you really are in it for the long term a SIPP is a better option and the state will 'give 'you another £20 to add each month. I've just started another SIPP and I'm retired but free money added till I'm 75 .  

wmb194

From a tax standpoint, simpler than an ETF or an OEIC would be an investment trust.

EthicsGradient

wmb194 said:

From a tax standpoint, simpler than an ETF or an OEIC would be an investment trust.

But investment trusts that track indexes are very rare.

wmb194

EthicsGradient said:

wmb194 said:

From a tax standpoint, simpler than an ETF or an OEIC would be an investment trust.

But investment trusts that track indexes are very rare.

More than rare, I think they're extinct. My point still stands and you can find pseudo-trackers e.g., City of London essentially tracks the FTSE100.

alongtimetogoyet

Thank you for all your comments but I'm not sure I've quite got the answer I'm looking for. Probably my poor way of explaining it. 

All I need to know is how the CGT would be calculated if an index fund was sold either in part or whole. The fund would be accumulated over approximately 15 years with a regular monthly contribution. 

TIA

ColdIron

Very simply: Add up the number of units bought and all of the purchase costs (if any). Divide the total cost by the number of units. That's your weighted average cost per unit

When you sell, the difference between the sale value and the cost per unit * the number of units sold is your gain

NB sales do not change the cost per unit, only the number of units so you can do this again next time you sell

If you make another purchase recalculate the cost as above

If you use Inc units that's it, if you use Acc units you'll have to deduct the dividends from the gain(s)

Definitely keep a running total in Excel to avoid a lot of pain in 15 years time

Even better, do it in an ISA and forget all of the above

alongtimetogoyet

Thank you for this. Exactly what I was after.

Very simply: Add up the number of units bought and all of the purchase costs (if any). Divide the total cost by the number of units. That's your weighted average cost per unit

When you sell, the difference between the sale value and the cost per unit * the number of units sold is your gain

NB sales do not change the cost per unit, only the number of units so you can do this again next time you sell

If you make another purchase recalculate the cost as above

Presumably I'd need to be recording this regularly given that I'm investing monthly as the unit prices will always be different.

If you use Inc units that's it, if you use Acc units you'll have to deduct the dividends from the gain(s)

It'll most likely be an Acc so will also keep a cumulative note of the Dividends to deduct at time of sale. Will I need to bear in mind the annual total for the dividends as will this be subject to a tax on dividends? Or is it exempt if I am choosing to reinvest them? 

Even better, do it in an ISA and forget all of the above

Dont have that option otherwise I would have done so.