Threadneedle UK Fund Retail Net Income CGT Query

[GN100]

I received an e mail from a friend with a CGT query on a potential disposal of his now 'Threadneedle UK Fund Retail Net Income' holding. I quote him below:-

"I bought 1028 units in Allied Asset Value Trust on 26-10-1984. Allied changed to Allied Dunbar then Threadneedle and now Columbia Threadneedle so I now have 27,562 units in Threadneedle UK Fund Retail Net Income. I think I paid £2k in 1984 and the value is now about £34k."

This looks like a large CGT bill to my unqualified eye. Can Indexation and Taper Relief help applied for the appropriate periods?

Any help appreciated as to the probable tax involved and what he puts on his tax return.

GN

[Alaric]

Any help appreciated as to the probable tax involved and what he puts on his tax return.

The allowance,before CGT is payable, is £ 11,100 in 2016-17.

https://www.gov.uk/capital-gains-tax/rates-6-april-2016

If he hasn't sold yet and doesn't want to pay any tax, the better idea would be to sell the holding over at least three tax years. Potentially the tax is on the proceeds (around £ 32,000) less the purchase price ( £ 2,000). Tax on the gain is at 10% or 20% as described in the link.

[GPhelan]

Hi,
I profess no specialist knowledge in this matter, but have some practical experience in that last tax year I had to include the CGT calculations for selling a number of funds with my tax return.

My first observation is that there is insufficient information about the current case. The fund is named as "...Retail Net Income". So did it in fact pay any income, either as dividends or interest. What happened to that income?
If the owner had the income paid out, then the capital gain is more or less as it appears, but see below. If the income was reinvested, then an entirely different analysis is required. This is because the reinvested income is added to the initial investment, so that rather than the gain being from £2k in 1984 to £34k today, it will be something like £2k + 30 years of income to £34k.

Of course this is HMRC, so it is not that simple. As they see it, every time a reinvestment took place then the new units purchased were at a different price, so they are a different version of the same fund unit. Maybe costs such as commission were involved, so these can also be allowed for to the benefit of the owner.
The end result is that you have to create what HMRC call a Section 104 pool. The underlying philosophy is that unlike the old system of indexation and tapering, at the point of disposal you do not need to know the (different) purchase price of each share or fund unit, just the average price as computed by the Section 104 pool. Of course you need the documentation from 1984 onwards to create the pool. It is described in a HMRC helpsheet: HS284 Shares and Capital Gains Tax (2016) This is on "https://www.gov.uk/government/publications/shares-and-capital-gains-tax-hs284-self-assessment-helpsheet/hs284-shares-and-capital-gains-tax-2016" which I have inserted as text to avoid problems.
You must read this together with "Example 3(2016) which provides an almost readable example of the calculations you do.
"https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/504872/HS284_Example_3__2016.pdf"

A further money saving question is whether the income included Equalisation (the original income statements will say). Equalisation is counted as return of capital and in computing the CGT gain reduces the gross gain.

Alas if only life were as simple(!) as the above. If the owner held the fund all the way through from 1984, that is sufficient. However you say that it was renamed. If indeed it was JUST the name that changed, all is well. However it is likely that it was merged with other funds along the way such that 1 unit of the 1984 fund is not the same as 1 unit of the 2016 fund. It is also possible that the fund was converted in other ways over the years, such as by splitting the units, or converting the share class and hence changing the number of units you own.

This is NOT so very complex to handle, but does need to be included in the Section 104 pool. I do this by making multiple Section 104 pools over time, with fund A linked to fund B by just the pool value on the date of the change.

There is a page about company takeovers and re-organisations, which is helpful but maybe not 100% relevant to funds. It does not have a snappy help-sheet name, but is here: "https://www.gov.uk/guidance/capital-gains-tax-share-reorganisation-takeover-or-merger"

If the income had been paid out then the adjustment for equalisation is still relevant.

Have fun!

[Gengulphus]

Can Indexation and Taper Relief help applied for the appropriate periods?

GPhelan's reply is pretty comprehensive, but only answers this question by implication. The answer is basically no: when the CGT system was simplified from the start of the 2008/9 tax year, CGT rates came down significantly but all previously-built-up indexation and tapering ceased to be usable.

It's probably unlikely to be relevant, but I believe there's an exception to that for indexation built up by a spouse if the holding was transferred to the other spouse before the simplifications came into effect, i.e. on 5 April 2008 or earlier. The reason for that exception is that the indexation was used at the time of the transfer - e.g. if the spouse who originally owned the asset had a base cost of £10k and indexation of £2k at the time of the transfer, then the 'no gain/no loss' rules about inter-spouse transfers say that the transfer was deemed to happen at a value of £12k, to ensure that that spouse realised neither a gain nor a loss. As a result, the other spouse is treated as having a base cost of £12k and no indexation, and so the simplifications did not make the extra £2k unusable.

There is no corresponding exception for taper relief, because taper relief was a percentage adjustment to the gain rather than to the base cost. So the same 'no gain/no loss' rules that allow the indexation to affect the recipient's base cost also ensured that the taper relief had nothing to adjust.

Gengulphus

[GN100]

Thanks all for the comprehensive replies - I will pass them on.

GN

[helfordpirate]

Hi,
A further money saving question is whether the income included Equalisation (the original income statements will say). Equalisation is counted as return of capital and in computing the CGT gain reduces the gross gain.

The other way around! Equalisation is subtracted from the base cost and so increases the gain. Equalisation is a return of capital and so you have the same amount of units for a lower capital cost.