The Lemon Fool

Hi everyone

I was wondering if anyone could suggest of a simple, methodical strategy for investing in index trackers outside of an ISA, bearing in mind CGT. I am struggling to get my head round it so would welcome some pointers.

1. Buy distribution units if buying a unit trust (so as to keep it simple).
2. Only buy once a year (don't bother investing regularly, save it up and then purchase once).

2019/20 tax year

Buy VWRL on April 6th 2019
Sell VWRL on April 5th 2020

2020/21

Buy Vanguard FTSE Global All Cap Index Fund (Income) on April 6th 2020 (including additional cash savings + dividends built up over the year)
Sell Vanguard FTSE Global All Cap Index Fund (Income) on April 5th 2021

2021/22

Repeat same as 2019/20....

Anyone see anything "wrong" with this and maybe suggest other possible pairings?

Being methodical keeps it simpler for me and also I thought may help by always crystallising gains / losses each year.

Would the tax man have anything to say about buying something so similar the day after a sale? ie.Does it contravene bed and breakfasting rules?

TIA

Del

deltrotter wrote:Would the tax man have anything to say about buying something so similar the day after a sale? ie.Does it contravene bed and breakfasting rules?

The tax man would have nothing to say as this does not trigger any bed and breakfast rules, as you are selling one asset and buying a different one.

The fact that the two assets are similar is irrelevant - they are still different.

PochiSoldi

Thanks PochiSoldi

Appreciated - also, I guess me doing the buying/selling at the end/start of a tax year is only for simplicities sake, it doesn't matter when I do it for CGT purposes. I could therefore say sell VWRL and then 2 seconds later buy another fund/etf with the money.

I would welcome any other thoughts or pointers - especially as to 'pairs' of global type trackers that I could use.

pochisoldi wrote:The fact that the two assets are similar is irrelevant - they are still different.

It is a loophole of sorts, but not one that HMRC or the Government has shown any interest in closing.

deltrotter wrote:Being methodical keeps it simpler for me and also I thought may help by always crystallising gains / losses each year.

You should certainly crystallise gains up to the £11.7k (or whatever) annual CGT allowance. This is a use-it-or-lose it allowance, and using it beats losing it.

There is no reason to crystallise losses though, unless you have more than £11.7k (or whatever) of crystallised gains elsewhere in a year. And in particular, if you crystallise losses when you have other crystallised gains of less than £11.7k (or whatever) then you effectively give up a part of your annual CGT allowance that you could otherwise have used.

As for timing ... it's usually a good idea to wait until late in the year to take gains, to avoid a possible forced gain (from some other investment's 'corporate action', say) from messing up your calculations, but leaving things until April 5 is living on the edge. Late March would be fine, and give you time to sort everything out without undue and unnecessary haste. If you find you reach £11.7k (or whatever) of gains early in the year you could either make your swap then, or if waiting then swap just some of your holding and leave the rest, then swap back later (at minimum 31 days), and so on.

Thanks Ted - appreciate this.

@ted, doesn’t the ability to carry forward losses mean that it is worth crystallising them?

Would be interested in that as well.

But, I guess it is something like this?

Buy at 100
Price goes to 90 so sell and crystallise loss of 10
Buy again at the 90
Price then goes to 110 and then sell and use the 10 cystallised loss to offset the 20 gain (110 minus 90), so giving gain of 10.

Exactly the same as doing nothing - ie. Buy at 100 and sell at 110...

I think!

The Bed and Breakfast rules don't apply even if you use 2 FTSE 100 trackers. Although they nominally have the same components, HMRC treat them as different investments.

Ok, does VWRL have a matching "Competitor" ETF? So that it would be possible to sell one and buy the other a second later and thus be still tracking the same index?

With funds I guess there would be at least a day in between selling one and buying another... With ETFs by their nature it should be possible to make the switch immediately.

deltrotter wrote:Buy at 100
Price goes to 90 so sell and crystallise loss of 10
Buy again at the 90
Price then goes to 110 and then sell and use the 10 cystallised loss to offset the 20 gain (110 minus 90), so giving gain of 10.

Exactly the same as doing nothing - ie. Buy at 100 and sell at 110...

Precisely this. By doing nothing you get the same outcome but avoid both unnecessary trading costs and fiddling about with self assessment carry forward losses.

The time to crystallise a loss is when you need it to offset gains elsewhere in excess of the annual allowance, or (unavoidably) if you want or need to take cash out of the investment for some reason.

TedSwippet wrote:Precisely this. By doing nothing you get the same outcome but avoid both unnecessary trading costs and fiddling about with self assessment carry forward losses.

I would have thought the strategy would be to buy a tracker of an index where there were at least two competing funds. If over a tax year, there's a loss, do nothing. Otherwise sell and repurchase another or the other tracker.

Keep the gain and proceeds under the allowances, you don't even need to report it in detail, other than to declare that your gains were within the allowance.

Alaric wrote:

TedSwippet wrote:Precisely this. By doing nothing you get the same outcome but avoid both unnecessary trading costs and fiddling about with self assessment carry forward losses.

I would have thought the strategy would be to buy a tracker of an index where there were at least two competing funds. If over a tax year, there's a loss, do nothing. Otherwise sell and repurchase another or the other tracker.

Yes, that's exactly it -- the original question drifted into the "what if there's a loss?" side of things.

In detail, the mechanics of this would be: Find two trackers X and Y that track the same thing. Buy £whatever of X and £0 of Y. Around mid to end of March each year, for each of X and Y, if there is a capital gain then swap X for Y or Y for X, stopping at £11.7k (or whatever) of total crystallised capital gain.

Thanks Ted - that is what I am thinking of doing.

Hoping to do it with ETFs if I can find matching pairs, if not, funds will do, e.g.

L&G International Index Trust I Class Inc (GB00B2Q6HX78)
Vanguard FTSE Dev World ex UK Equity Index Inc (GB00B5B74F71)

deltrotter wrote:Hoping to do it with ETFs if I can find matching pairs, ...

Finding fully matching ETFs here is surprisingly fiddly. Maybe look at iShares SWDA/IWDA. These track the MSCI global index so not quite the same; you may need to blend a bit of Emerging Markets to get the same mix. Also, iShares can be accumulating and/or GBP hedged, so there's another twist there. Dividends inside accumulating funds and ETFs can be especially tricky to handle for income tax when held in non-sheltered accounts.

Here is a reference to a US Vanguard paper that discusses deltas between global indexes. Its final conclusion appears to be that it mostly just does not matter which global index is tracked:

https://personal.vanguard.com/pdf/icregb.pdf

Remember you need to declare sales if they are more than 4*allowance, even if no taxable gain/loss is made

deltrotter wrote:... if not, funds will do, e.g.
L&G International Index Trust I Class Inc (GB00B2Q6HX78)
Vanguard FTSE Dev World ex UK Equity Index Inc (GB00B5B74F71)

Just in case you missed this detail ... neither of these is equivalent to VWRL, referenced in your original post. Ex-UK indexes omit UK stocks, currently around 6% or so of global market cap. VWRL is global, and so includes a UK component.

TedSwippet wrote:In detail, the mechanics of this would be: Find two trackers X and Y that track the same thing. Buy £whatever of X and £0 of Y. Around mid to end of March each year, for each of X and Y, if there is a capital gain then swap X for Y or Y for X, stopping at £11.7k (or whatever) of total crystallised capital gain.

Caution is required where capital losses are made on other assets.

"Same year losses" are used up against "same year gains" even if that results in the annual allowance going unused. In this scenario any unused CGT allowance is lost.

However if you have a choice, you can realise losses in one year, carry the loss forward, and then realise gains the following year.
Any unused carried forward losses get carried forward until you actually use them.

This gives two options when you have a capital loss and can "opt to take gains":

Option 1: Take gains equal to current year's CGT allowance + current year's capital losses (+ previous year's carried forward losses if possible/desired)

Option 2: Take no gains, carry forward the loss for future use.

Option 1 is taken if you have a holding big enough to register a large gain
Option 2 is taken when your holding is small, and you expect it to get bigger.

The decision as to which option is taken is done on annual basis, as you approach the last week of March.

It might seem barmy to give up a year's CGT allowance, but if your expected capital gains over the next few years are expected to be less than the accumulated exempt amount, it might be worth "losing" one year's allowance in exchange for a loss which can be used at a time of your own choosing.

PochiSoldi

JohnB wrote:Remember you need to declare sales if they are more than 4*allowance, even if no taxable gain/loss is made

That is only applicable for those who have to complete Tax Returns for whatever reason.

There are additional criteria if you do, such as (my bold) your chargeable gains before taking off any losses were more than £11,300 (‘annual exempt amount’) for 2017-18 from:

https://assets.publishing.service.gov.u ... s-2018.pdf

pochisoldi wrote:Caution is required where capital losses are made on other assets.
...
"Same year losses" are used up against "same year gains" even if that results in the annual allowance going unused. In this scenario any unused CGT allowance is lost.

Indeed. This can be a major PITA with capital gains tax.

I have only ever had one stock holding go to zero and provide me with a decently-sized and unavoidable capital loss whose timing I could not control. The one year this happened, it coincided with a slightly smaller but also unavoidable capital gain elsewhere, yet with no other gains available to take and so 'soak up' the remaining allowance.

Had these two events, the loss and the gain, occurred in different years I could have avoided having to net them out. As it was, I lost almost all of an entire year's capital gains allowance here, purely due to unfortunate timing and the annoying-ness of capital gains tax rules. Sigh.