CSH2: taxation and performance

masonic

aroominyork said:

masonic said:

aroominyork said:

I’ve deleted yesterday’s post to correct some misaligned columns and to add SONIA, which is the benchmark for CSH2. This table shows that SONIA tends to hover just under the base rate, but as the base rate has risen SONIA has got incrementally closer to it (column "SONIA/base rate").

The right hand column shows the annualised CSH2 return (price data from Yahoo) as a percentage of SONIA (eg CSH2 returned 102% of SONIA between 23/3/23 and 11/5/23 when the base rate was 4.25%). CSH2 generally meets its aim to "achieve short term returns higher than the benchmark rate Sonia with extremely low volatility". What do people think will happen to CSH2 when the base rate starts being cut? Is there any reason to think it will not continue to be a good home for unwrapped cash if personal savings allowance and CGT allowance are both maxed out? It is currently returning better than low coupon short duration nominal gilts, even after allowing for 10% CGT on CSH2.

The short answer is that at some point the yield curve will no longer be inverted. When that time comes you'd be in a position to weigh up whether the duration risk premium is worth it. Until then longer duration debt seems to be priced according to predictions of falling rates that have not yet materialised.

Agreed, but that answers a different question: of whether short duration is the right place to be right now. This is money in the proxy-cash bucket: OH stopped working recently and I'll probably start winding down during the next few years. The funds are in TN25 which has risen c.5.5% since bought about a year ago; its yield (to maturity next January) is now 4.3% so I want to check I am not missing anything before switching to CSH2.

I think you've shown that outside of "silly" base rates, CSH2 tracks base rate quite closely. So you can safely assume it will move down in lockstep with base rate. What is unknown is what will happen to the rest of the yield curve. The best guess is that base rate isn't going to fall far enough that you'd miss out on capital gains should you sell your TN25 early. So exchanging for CSH2 is unlikely to see you lose out. But another alternative is to roll into another gilt, which perhaps you might have been inclined to do for yields exceeding CSH2 when all indicators point to rates falling, in turn giving scope for bond prices to rise, if it weren't for the inverted yield curve.

aroominyork

masonic said:

aroominyork said:

masonic said:

aroominyork said:

I’ve deleted yesterday’s post to correct some misaligned columns and to add SONIA, which is the benchmark for CSH2. This table shows that SONIA tends to hover just under the base rate, but as the base rate has risen SONIA has got incrementally closer to it (column "SONIA/base rate").

The right hand column shows the annualised CSH2 return (price data from Yahoo) as a percentage of SONIA (eg CSH2 returned 102% of SONIA between 23/3/23 and 11/5/23 when the base rate was 4.25%). CSH2 generally meets its aim to "achieve short term returns higher than the benchmark rate Sonia with extremely low volatility". What do people think will happen to CSH2 when the base rate starts being cut? Is there any reason to think it will not continue to be a good home for unwrapped cash if personal savings allowance and CGT allowance are both maxed out? It is currently returning better than low coupon short duration nominal gilts, even after allowing for 10% CGT on CSH2.

The short answer is that at some point the yield curve will no longer be inverted. When that time comes you'd be in a position to weigh up whether the duration risk premium is worth it. Until then longer duration debt seems to be priced according to predictions of falling rates that have not yet materialised.

Agreed, but that answers a different question: of whether short duration is the right place to be right now. This is money in the proxy-cash bucket: OH stopped working recently and I'll probably start winding down during the next few years. The funds are in TN25 which has risen c.5.5% since bought about a year ago; its yield (to maturity next January) is now 4.3% so I want to check I am not missing anything before switching to CSH2.

I think you've shown that outside of "silly" base rates, CSH2 tracks base rate quite closely. So you can safely assume it will move down in lockstep with base rate. What is unknown is what will happen to the rest of the yield curve. The best guess is that base rate isn't going to fall far enough that you'd miss out on capital gains should you sell your TN25 early. So exchanging for CSH2 is unlikely to see you lose out. But another alternative is to roll into another gilt, which perhaps you might have been inclined to do for yields exceeding CSH2 when all indicators point to rates falling, in turn giving scope for bond prices to rise, if it weren't for the inverted yield curve.

But that (inverted yield curve aside) would mean the kind of duration held by index bond funds, and those are already in my middle bucket. If I handed my funds to you I could probably do a bit better, but for me it's a KISS strategy. The only serious sting with CSH2 seems be be Labour abolishing the CGT allowance and increasing the rate to 20%, but that would not start until FY26 so I still have over nine months to make a little hay.

masonic

I dare say CSH2 will look less attractive for pure interest rate reasons before the start of the next tax year. Though I don't think one can be confident in the detail of future tax policy. The consequence of no CGT annual exempt amount will be many people having to register for self assessment to declare trivial sums. It might be better to increase the limit alongside an equalisation of tax rates. Then there is some reward for risk capital, but at a limited cost per taxpayer. And casual investors can stay out of SA.

If it were my choice, I'd prioritise removal of the PSA and resume deduction of basic rate tax at source from bank interest. Leaving in place the starting rate for savings and allowing savers to register for gross interest where applicable. The PSA made sense in the low interest rate era, but now it causes a large amount of work for HMRC and those savers who have to declare their interest. As one of the lucky few to reap the maximum benefit, I'd gladly forego the £200 for a simpler life.

aroominyork

masonic said:

I dare say CSH2 will look less attractive for pure interest rate reasons before the start of the next tax year. Though I don't think one can be confident in the detail of future tax policy.

Yup, but even if base rates fall 0.75% and allowing for 10% CGT it will still net c.4.2% which is pretty much what the alternative T26A is yielding at the moment, so unless base rate fall more than expected I can always hop over there next year.

masonic said:

If it were my choice, I'd prioritise removal of the PSA and resume deduction of basic rate tax at source from bank interest. Leaving in place the starting rate for savings and allowing savers to register for gross interest where applicable. The PSA made sense in the low interest rate era, but now it causes a large amount of work for HMRC and those savers who have to declare their interest.

Yes, but think of all the anoraks the nominal gilt shop has sold!

aroominyork

Are there any other cash proxy funds that are taxed as capital gains rather than on interest, please?

masonic

aroominyork said:

Are there any other cash proxy funds that are taxed as capital gains rather than on interest, please?

There is another synthetic ETF tracking SONIA - XSTR - but this distributes income, so wouldn't be a contender. Unless you fancy one of the foreign currency money market funds, then I don't think there's anything else structured in this way.

Ciprico

The gains from CSH2 are not purely capital gains.

As is contains amongst other things gilts that produce income and gains, the fact that is accumulates does not make the gains completely CGT.

I tried to find out how to calculate the income and CGT elements but failed. So keeping CSh2 outside a wrapper needs careful consideration.

As a result I am an anorak holding simple low coupon gilts that do produce tax free capital gains in a general acct

masonic

Ciprico said:

As is contains amongst other things gilts that produce income and gains, the fact that is accumulates does not make the gains completely CGT.

It does not contain any gilts or other fixed interest assets. As per the Amundi ETF website, "This fund uses synthetic replication to track the performance of the Index". As per recent annual and semi-annual reports, it holds swaps to the value of ~EUR 2bn with Societe Generale to match the performance of a blend of Eonia Index, Sonia Index and Fed Funds Index. These reports also state that "For the avoidance of doubt, the sub-fund Lyxor Index Fund – Lyxor Smart Overnight Return did not invest in money market papers over the period".

Ciprico said:

I tried to find out how to calculate the income and CGT elements but failed. So keeping CSh2 outside a wrapper needs careful consideration.

This is straightforward for an accumulating ETF, you just need to find the Excess Reportable Income. In the case of this fund, you can register at https://www.kpmgreportingfunds.co.uk/ as discussed in the first reply to this thread. ERI has been zero for the last few years, so that is the amount of the income element for those years.

Ciprico

I stand corrected !

aroominyork

Ciprico said:

I stand corrected !

And I am glad you are! Under the current CGT rates (...carefully avoiding political debate...) CSH2 seems to be a uniquely useful instrument.