In April, platforms were banned from receiving payments from fund managers on new business. From April 2016, they will additionally be banned from receiving payments on all historical business.
With this ongoing move to explicit platform charges across the board, there has been and will continue to be an inevitable movement of the investor from a higher annual management charge or bundled classes into a corresponding lower AMC or clean share classes.
With this so-called platform sunset clause just over a year away, it seems a suitable time to take stock of the capital gains tax rules apposite to this industry transition.
First, the rules on moving to a different share of the same fund. Shifting bundled share classes to clean classes can be achieved by switching (that is, a concurrent instruction to sell then buy) or by share class conversion, which is effectively an internal change on the register. Where exchange is undertaken at the behest of the investor through a switch process, it must involve only a single conjoined instruction from the investor and there must be no interval between the sell and buy events beyond the minimum ordinarily necessary to achieve the transactions.
In June 2013, new section 103F was added to the Taxation of Chargeable Gains Act 1992 to put the matter on a statutory footing. In essence, where the same investor in the same capacity exchanges units or shares of one class of a fund for units or
shares of another class of the same fund, it will generally be treated as a share reorganisation. Accordingly, it is not a disposal for the purposes of CGT and the acquisition cost from the old share class is rolled over to the new holding.
This will apply to most exchanges between different AMC share classes of the same fund and/or exchanges between accumulation and income classes of the same fund.
It is, however, a requirement that the fund assets and the investor’s rights to share in capital and income of those assets are the same immediately before and after the exchange (ignoring any changes as a result of a variation in management charges). Therefore, exchanges that involve some change in fund assets or investor rights, such as switching from an unhedged class to a hedged class (or vice versa), are treated as disposals.
Should an investor hold both bundled share classes and clean share classes of the same fund at the same time, we need to consider the pooling rules and 30-day buy-back or bed-and-breakfast rules.
Shares are only pooled (in a section 104 pool) where they are shares of the same class. Accordingly, the bundled and clean are not averaged together but are treated as two separate holdings and do not form a single s104 pool. This dovetails into the bed-and-breakfast rules, which means, technically, the disposal sale of a bundled share class with a subsequent repurchase of the clean class – say, 21 days later – does not trigger the rules.
So it is impossible to operate the bed-and-breakfast rules where you have differing share classes with differing prices. In truth, it is a CGT anomaly thrown up by the RDR.
Finally, however, we come to what was always likely to be a negative outcome of the RDR and the transition to explicit charging.
Previously, commission was paid by the fund manager. In essence, the investor paid a higher charge for the product, with the provider then ceding a part. This had the advantage of keeping things outside the client’s own tax affairs.
Nowadays, where the fees are facilitated from underlying collective investments, the investor is in fact cashing investments to meet a fee, which brings direct tax consequences.
Unfortunately, CGT is not particularly forgiving when it comes to offsetting adviser fees against taxable gains. Fees paid to an adviser are deductible only to the extent they are directly referable to the cost of acquiring or disposing of an investment. To the extent they relate to financial planning, advice about markets or the prospects of particular forms of investment or the management of a portfolio, they are not allowable.
Paul Kennedy is head of tax and trust planning at Fidelity FundsNetwork