Inevitably, in today’s electronic environment, the odd mistake is made when selling investment funds. Whether through inputting the wrong number or simply miscalculating, one of the most profound mistakes is where a more-than-intended gain is realised. Uncorrected, this can bring adverse capital gains tax consequences for an individual.
Putting aside any wider plea in mitigation one may wish to advance to HMRC, let us look at how a gain might be corrected within the CGT rules on matching acquisitions and disposals of shares of the same class.
To calculate the gain on a sell, disposals must first be matched against acquisitions on the same day (same day rule), then against acquisitions within the 30 days following the disposal (bed and breakfast rule), then against shares in the wider longer held pool (Section 104 holding). Shares bought but matched under the same-day or 30-day rule do not enter the pool.
It is critical to understand that simply buying units back within 30 days does not mean the original mistaken sale is ignored. There is always some kind of CGT transaction with corresponding gain or loss and I tend to find this one of the most misunderstood rules.
Assume a total holding of 50,000 units, valued at £100,000 with base cost of £50,000. Thus, there is a gain of £1 per unit based on sell price of 200p and base cost of 100p. It was intended to sell 10,000 units for an amount of £20,000 to produce a gain of £10,000 but, unfortunately, 15,000 units were sold, for £30,000 producing a CGT gain of £15,000.
If corrected immediately with 5,000 units bought back straight away at 200p then the same-day rule offers salvation. There will be a sale of 5,000 units at 200p matched against an acquisition cost of 200p so no loss or gain. The remaining 10,000 units sold at 200p will continue to be matched against the pool cost of 100p giving the required gain.
However, if repurchase takes place outside the same-day but otherwise within the 30-day B&B period it becomes more complex where the unit price has changed. Assume the buy-back is made 21 days after original sale, at which time the unit price has risen to 210p.
This means any units of the original sale matched against buy-backs will show a loss of 10p. If 5,000 units are bought, then the original sale will show 10,000 units sold at 200p matched at 100p (gain £10,000) and 5,000 sold at 200p matched at 210p (loss £500), producing a total gain of £9,500.
The buy-back of 5,000 units costs £10,500 whereas the original sale released only £10,000. So, let’s do this in monetary terms: if £10,000 is used to buy-back at 210p this will buy 4,761.9 units. This will produce 10,238.1 units sold at 200p matched at 100p (gain £10,238.10) and 4,761.9 units sold matched at 210p (loss £476.19) producing a total gain of £9,761.91.
To be spot on we need a touch of maths and should work in units not pounds. Each unit matched against the pool will show a £1 gain and each unit matched against the buy-back will show a 10p loss.
Building a formula or a bit of trial and error will show that 4,545.46 units should be repurchased. 10,454.54 units will be sold at 200p matched at 100p (gain £10,454.54) and 4,545.46 units will be sold at 200p matched at 210p (loss £454.54). So, at the current price of 210p an amount of £9,545.47 should be used to purchase units.
If the unit price has reduced since the original sale, say, to 190p, then bought back units will show a 10p gain. It is the same principles just in reverse. Buying back 5,000 units would still show overall gain of £10,500 and using the £10,000 of oversell would show an overall gain of £10,263.
Here 5,555.55 units should be repurchased. 9,444.45 units will be sold at 200p matched at 100p (gain £9,444.45) and 5,555.55 units will be sold at 200p matched at 190p (gain £555.55). So, at the current price of 190p, an amount of £10,555.45 should be used to purchase units.
With forward pricing it may be tricky to be spot on first time and the more pedantic may want a second corrective action. Finally, remember the rules can be different where there have been periods of non-residence.
Paul Kennedy is head of tax and trust planning at Fidelity FundsNetwork