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IFDS warns of tax charge on hedged share class conversions

IFDS group chief executive David Moffatt

Fund administration firm IFDS has warned capital gains tax is chargeable when hedged share classes are switched into clean share classes despite a recent HM Revenue & Customs announcement exempting share conversions.

Last month, HMRC amended legislation to remove capital gains tax charges when selling down bundled assets to move into clean share classes.

The change means any capital gains tax charge would be rolled over until final disposal of the assets. The amendment was made to ease the transfer of assets into clean share classes.

Speaking at the Money Marketing re-registration round table last week, IFDS group executive David Moffat said where a share class that is hedged to an underlying currency is converted into a clean share class, capital gains tax will be charged because the underlying investment is being changed.

He said platforms that are looking to carry out bulk switches of assets into clean share classes could find some assets cannot be transferred automatically because the tax charge will need to be applied.

He said: “One thing we are having to track and which adds extra complexity is where you are moving between a hedged share class which is hedged to the underlying currency. That is a capital gains tax event because you are materially changing the underlying investment.

“That is something which needs to be watched when looking at bulk transfers because transfers from hedged share classes cannot be processed on this basis.”

Data from Morningstar shows there are currently 158 hedged share class funds in the UK, representing just under 2 per cent of all funds in the UK market.

Avalon Investment Services managing director Harry Kerr says: “For the vast majority of clients, bulk switches will be fine but obviously there are a few cases where you have to be careful because tax charges will apply.”


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