Capital gains tax will not be payable upon switch to clean share classes, says HMRC

CGT may still be owed on switched investments but will not have to be paid until the "final disposal" of the assets, HMRC told Out-Law.com.

There had been concerns within the platforms industry that they would have to carry out complicated calculations relating to CGT when switching clients' assets over to ones with clean share classes.

Many platforms have taken the decision to move away from offering financial products for investment that involve issuing rebates to investors, which can sometimes be offered as an incentive for selecting particular products to invest in. The move within the industry comes after the Financial Conduct Authority (FCA) outlined plans to restrict cash rebating and follows an earlier announcement by HMRC that rebates, whether in cash or unit form, would be subject to income tax deductions.

Several platforms have subsequently announced a change to their business models in order to avoid having to account for rebating and income tax calculations and as such have been seeking to switch clients' assets over to ones with 'clean' share classes, where neither commission nor rebates are payable.

An article by New Model Adviser had reported that HMRC was "waiving" CGT when assets were being switched to clean share classes, but an HMRC spokesman told Out-Law.com that was not being waived but was instead being "rolled over until final disposal". New legislation, which came into effect on 8 June, meant the rolling over of CGT could take place, he said.

"The change was made to facilitate the move to clean share classes," the HMRC spokesman said. "[The Collective Investment Schemes (Tax Transparent Funds, Exchanges, Mergers and Schemes of Reconstruction) Regulations] have the effect of treating the new share class issued as the same asset as the old for which it was exchanged. This means that any CGT charge is rolled over until final disposal of the new share class holding."

These regulations set out the CGT, stamp duty and VAT treatment of a new type of fund called authorised contractual funds. These funds are being introduced to facilitate the setting up of UK pooled "master fund" investment vehicles under the Undertakings for Collective Investment in Transferable Securities (UCITS) IV Directive.

"This legislation has been enacted in connection with the new tax transparent funds but HMRC has taken the opportunity to clarify the circumstances that generally relate to where one asset is exchanged for another very similar asset due to a reorganisation or merger or ... a switch to a share class with a different management charge," he added.

Tax law expert John Christian of Pinsent Masons, the law firm behind Out-Law.com, said: "The change is part of a wider group of changes aimed at allowing certain types of fund reorganisation to take place on a capital gains neutral basis. This is to be welcomed as it removes a potential tax obstacle to commercially driven fund restructures. It also shows that the Government is responsive to the UK fund industry’s needs for a funds tax regime that allows the UK to remain competitive, as evidenced also by the new tax transparent fund rules."

CGT is charged on the gain made from an asset. This gain is calculated by deducting the acquisition cost of that asset, together with any costs associated with the acquisition or disposal such as stamp duty or legal fees, from the proceeds of the sale.

Every individual has an annual tax free allowance set by HMRC which means that there is no CGT to pay in any tax year if an individual does not exceed this annual exempt amount. To the extent that an individual exceeds their annual exempt amount, CGT is charged on the amount of the excess. The precise rate of CGT payable depends on the amount of an individual's total taxable income and gains from all sources.