Tax management via multiple section 104 pools

[TedSwippet]

I am mulling over how to invest a lump sum outside of a pension and ISA, and it seems like as a passive investor, there is some opportunity to play a few games with section 104 holding pools that might ease potential future CGT timing issues.

Suppose I have a portfolio consisting of a single holding in fund A for which I paid £50k and which is now worth £100k, and I have another £50k lump sum to invest.

If I put this £50k lump sum into fund A alongside the current £100k, the only way I can take £50k back out of my portfolio now is by realising £16,667 of capital gain, and leading to a 10% or 20% capital gains tax liability on between £16,667 and £4,966 (depending on availability of the £11,700 annual allowance). An expensive withdrawal.

However, suppose fund B holds the same stuff as fund A, and with comparable annual charge. These funds are global trackers, so Vanguard, Fidelity, HSBC, and so on. If I put this £50k lump sum into fund B instead, I hold the precise same underlying assets, but now I keep my options much more open. If I decided after a few months that this was a mistake, or I needed money for something else, I could take £50k out of the portfolio with vastly lower and perhaps even no realisation of capital gains, by simply selling fund B but leaving holdings of A entirely alone. A better tax result, and also better long term returns as fund A can continue to compound without being eroded by tax.

In other words, it seems like using different tracker funds that track the same indexes one can construct multiple 'tax lots' in different section 104 pools and add flexibility without compromising returns in any way. I don't think I have ever seen this described elsewhere, but maybe someone has written something on this and it has a fancy name that I'm unaware of.

Anyway, my question is: Is there any downside to this strategy? Some horror lurking far into the future that I have not envisaged? The terminal case, cashing in the lot, is identical either way, so it seems like it is all upside or neutral at its worst. Have I missed any subtleties?

[Lootman]

I believe that what you propose would work. The UK CGT rules appear to me to only apply to the exact same security, and an index fund from a different manager investing in the identical index is not considered the exact same.

Contrast that with the equivalent US rules that would deem it a wash sale if you reinvest in a "substantially similar" security.

So it is my understanding that you can bounce in and out of such index funds advantageously from a CGT perspective and enjoy a riskless free lunch. Similar strategies using options also work because, again, an in-the-money call option is not considered identical to the underlying.

[helfordpirate]

As lootman said, the UK rules for matching require the exact same security.
The same tactic can be used to replicate the old bed & breakfast strategy to ensure you use your annual cgt exemption..... sell enough fund A to use your allowance, buy back fund B which tracks the same index.

[Alaric]

The same tactic can be used to replicate the old bed & breakfast strategy to ensure you use your annual cgt exemption..... sell enough fund A to use your allowance, buy back fund B which tracks the same index.

I think this idea has been known for quite some time. It's just as while it's low profile and with no defined name as that reduces the temptation for HMRC to lobby to have the semi-loophole closed off.

[TedSwippet]

As lootman said, the UK rules for matching require the exact same security. The same tactic can be used to replicate the old bed & breakfast strategy to ensure you use your annual cgt exemption..... sell enough fund A to use your allowance, buy back fund B which tracks the same index.

Thanks. Indeed, and I already do that. I currently have two section 104 'tax lots' in my non-sheltered accounts, one consisting of HSBC tracker funds and the other of Vanguard tracker funds. My third will be Fidelity tracker funds. After that, unless I start adding ETFs -- and I may well, although VWRL's annual charge is frustratingly high relative to its component parts -- I am starting to run out of cheap yet convenient options.

I can see this works, but I guess what I was really after was some reassurance that there isn't a huge sting in its tail in a decade or two's time. An epic tax fail that would make one envy the dead at some point. So far it seems not, so that's good. (Well, absent governments changing the rules with retroactive consequences, of course...)

I think this idea has been known for quite some time. It's just as while it's low profile and with no defined name as that reduces the temptation for HMRC to lobby to have the semi-loophole closed off.

In which case, I designate this bed-and-breakfast extension activity "Swippet's Stratagem". A bit of a mouthful, but... meh. How does one go about trademarking it? :-)