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Share Identification Rules: Funds

Investors calculating Capital Gains on their unit trusts and OEIC investments need to apply the same identification rules to their units as when calculating gains on company shares. Don’t get caught out by the share identification rules - what you may assume to be a Capital Loss, could turn out to be a Capital Gain.

Whether saving for retirement or building a nest egg: buying units in funds, unit trusts and OEICs (Open Ended Investment Companies) is the simplest way for investors to gain exposure to the markets and professionally managed investment portfolios. But calculating Capital Gains (or losses) on these pooled investments is not so simple. Units held in a fund are treated as if they are shares in a company - meaning the units are subject to the same share identification, indexation and taper rules as shares, and any encashments of units or switches between funds are treated as disposals for Capital Gains Tax purposes. For anyone who has made a series of regular investments and withdrawals from a fund, calculating the Capital Gains can be onerous.

In order to calculate Capital Gains on partial withdrawals from a fund, investors first need to determine which units are deemed to have been sold - in accordance with HMRC Share Identification rules. Unit disposals are identified with unit acquisitions in the following order: Investors firstly need to match up units sold with units that may have been bought that same day, next the units are matched up with units purchased within the 30 days following the unit sale (bed and breakfasting rule). If the unit sale occurred before 6 April 2008, the units sold are matched with units bought on a ‘last in first out’ basis. Then, under the new CGT rules, any unmatched units are pooled together to form a new Section 108 holding to carry forward from April 2008 onwards.

For example, an investor pays £1,000 per month into ABC Fund as follows:

1st Dec 2007: buy 160 units @ 625p
1st Jan 2008: buy 200 units @ 500p
1st Feb 2008: buy 250 units @ 400p
1st Mar 2008: buy 350 units @ 286p

On 20th Feb the investor withdrew £2,500 from ABC Fund, the unit value on that day was 410p and a total 610 units were sold.

The units deemed to have been disposed of under HMRC rules, are matched up in the following order:

350 units purchased on 1st March 2008 @ 286p
250 units purchased on 1st Feb 2008 @ 400p
10 units purchased 1st Jan 2008 @ 500p

So the total purchase price of the units disposed of, according to HMRC share identification rules is deemed to be £2050.00. Meaning in this instance, because of the share identification rules, the investor is deemed to have made a Capital Gain of £450.00 on the £2,500 withdrawal - even though their fund has actually been falling in value.

They are left with 350 units at an average cost of 557.14p to carry forward into the new post April 2008, Section 108 pool:
1st Dec 2007: 160 units purchased @ 625p
1st Jan 2008: 190 units purchased @ 500p

Additional calculations may be required if the fund pays dividends / distributions or if units are purchased in between a fund’s dividend or distribution dates. The fund manager issues Dividend Certificates twice yearly. The certificates show dividends paid plus any ‘equalisation’ payments. An equalisation payment is a refund of capital invested when the price paid per unit includes accrued interest or dividend income. Since the equalisation payment is a return of capital it should be deducted from the purchase price of the units; whilst any dividends that are reinvested in the fund should be treated as a new unit purchase.

For the majority of investors who make regular investments into funds via monthly savings schemes, it is important they keep accurate records of the monthly unit purchases that they make. Calculating Gains can be a minefield, but fortunately help is at hand, as timetotrade has just launched a new Fund Tax Calculator which can be found at http://www.timetotrade.eu

To use the tool, investors simply input all historical transactions made on any funds, unit trusts or OEIC’s they have owned and timetotrade works out the rest - including complex calculations for: equalisation payments, notional distributions, share reorganisations, indexation, taper relief and share identification rules. The system also generates a completed Capital Gains Tax return form SA108 and provides a full breakdown of the supporting calculations, as now required by HMRC.

Dary McGovern, Managing Director of timetotrade commented “With HMRC migrating towards online filing, investors increasingly expect be able to self-manage their tax affairs online. This is the first time that such tools have been taken out of the professional domain to enable the man on the street to manage CGT on funds they own. This is a huge leap towards making tax less taxing for investors.”

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