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Calculating CGT on shares after merger

Practical Issues
Nocton
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Re: Calculating CGT on shares after merger

#432826

Postby Nocton » August 6th, 2021, 8:52 am

Gengulphus wrote: Yes, a reasonable approach, as long as one is willing to accept a few drawbacks, such as that its choice of which investments to put in tax-sheltered accounts might not be optimal (e.g. ISAs generally don't shelter one from withholding taxes on foreign security dividends when they would on UK security dividends, thus wasting part of the benefit of the tax shelter) and that it has a "tax tail wagging the investment dog" aspect, especially if the fraction of one's wealth that one has been able to get into tax-sheltered accounts is fairly small. In my case, confining ordinary shares to tax-sheltered accounts would have a big "tax tail wagging the investment dog" aspect, due to my use of a HYP strategy. (And just in case anyone feels I need to be told that there are other types of strategy that I could use, I don't - I already know it! And I'm aware of some of those other types of strategy, and will ask on a more appropriate board than this one if and when I want to know more about them.)
But in my case, there's quite a big drawback, namely the sheer size of the unrealised capital gains currently on the holdings in my taxable accounts. Any way of moving capital from them into other types of holding will realise massive capital gains, so simplifying my CGT position along the lines you suggest would involve either paying a lot of CGT in the near future if I want to get there at all quickly, or taking many years about it (and still paying quite a lot of CGT per year), or making a lot of use of various CGT mitigation measures (all of which have limits on their use, drawbacks of their own and/or conditions I would find unacceptable).
Yes, I know such large unrealised capital gains are a nice problem to have! And I'm not complaining about it - just explaining why the approach you describe towards simplifying CGT record-keeping and computations would present me with some decidedly difficult decisions to make. I do agree with your general suggestion of simplifying the investments held and how they're held, and indeed have been doing some simplifying over the last year or two and intend to do more - but I don't expect to be able to get anywhere near the level of simplicity you describe before the end of my life without some pretty seriously painful contact with the CGT nettle...

Very much agreed, Gengulphus.

This long reply and thread, confirms my use of Investor 3 software as sensible. I simply enter all my prices, transactions and dividends each month for four portfolios: ITs LTH, ISAs for my wife and me, AIM IHT portfolio. It takes 1-2 hours depending on how many dividends re-invested and trades made. But at any time I can calculate my CGT position for current and possibly future sales just by a couple of mouse clicks. At tax time I just print off the CGT report for each sale not in an ISA. I should certainly not be happy relying on a broker to keep all my records, some purchase going back over 30 years.

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Re: Calculating CGT on shares after merger

#432936

Postby Lootman » August 6th, 2021, 3:40 pm

Gengulphus wrote:it's really pretty obvious that penalties for not keeping required tax records are an essential part of the system - otherwise tax evaders could simply adopt a policy of never keeping any such records and replying "Sorry, cannot help" to any request for records from HMRC without penalty.

Yes, it is an exception to the general rule that you have the right to silence, and that your accuser has to prove the case against you beyond a reasonable doubt.

Although if your transgression was serious enough that the taxman launched a criminal investigation against you, then in that case claiming ignorance and silence might still be the optimal defence.

Gengulphus wrote:In short, relying on being able to find contract notes on one's broker's site has its risks, and they'll probably be highest for one's oldest transactions. I'm not saying that you personally need to be worried about those risks - your broker might be like my second broker, keeping contract notes available apparently forever, though note that their policy might be just to keep them available for a large number of years (e.g. on the evidence I've got, I don't know whether my second broker keeps them available or just for 20 years) and that companies can change their policies. But I am saying that it's for each reader to assess for themselves to what extent they can rely on their broker keeping contract notes available, and that different readers may come to very different assessments, not just for subjective reasons such as how risk-averse they are, but also for objective reasons to do with using different brokers.

True, although there is a backup plan. Many brokers maintain cost basis information for each position. In the absence of contract notes for your buys, you can at least present the broker data for your cost basis.

There are issues in some cases with the accuracy of that data, due to transfers in, positions split between brokers and corporate actions not handled correctly (*). But in my experience, in most cases those do not apply. And citing the third party number might be sufficient to get you out of a pickle. Or at least mitigate the suspicion. It is better than nothing.

Gengulphus wrote:
Lootman wrote:One thing you can do to simplify record-keeping is to keep all complexity out of taxable accounts. I no longer hold any of these in a taxable account:

ETFs, because of the excess reportable income complication
Foreign securities
DRIPs and regular investing, as noted upthread
Ordinary shares because of the greater risk of involuntary corporate actions

At this point I only have about 15 taxable positions, each very large, which are not traded. I sell one a year which more than utilises my annual CGT-free allowance. So if there was an investigation it would probably be about just one position and disposal, and I am confident I could answer their questions after some research, even with no records as you noted. If after that they fine me for not keeping proper records then so be it, but I deem that unlikely.

But in my case, there's quite a big drawback, namely the sheer size of the unrealised capital gains currently on the holdings in my taxable accounts. Any way of moving capital from them into other types of holding will realise massive capital gains, so simplifying my CGT position along the lines you suggest would involve either paying a lot of CGT in the near future if I want to get there at all quickly, or taking many years about it (and still paying quite a lot of CGT per year), or making a lot of use of various CGT mitigation measures (all of which have limits on their use, drawbacks of their own and/or conditions I would find unacceptable).

Yes, I know such large unrealised capital gains are a nice problem to have! And I'm not complaining about it - just explaining why the approach you describe towards simplifying CGT record-keeping and computations would present me with some decidedly difficult decisions to make. I do agree with your general suggestion of simplifying the investments held and how they're held, and indeed have been doing some simplifying over the last year or two and intend to do more - but I don't expect to be able to get anywhere near the level of simplicity you describe before the end of my life without some pretty seriously painful contact with the CGT nettle...

Yes, it has taken me 12 or so years to get to this point, paying gobs of CGT along the way. The key to me is not minding paying some CGT. At least in percentage terms, securities attract a CGT rate of 0%, 10% or 20%. Not bad in the grand scheme of things even without indexation.

And there is always a decent chance that CGT rates will go up in the future.

Of course if you really detest paying CGT and your motive is for your heirs to enjoy the uprating of cost basis upon your demise then my strategy isn't for you. But for me it is really about simplifying my affairs so that in my possibly senile dotage, my taxable portfolio will not be a burden to those very same heirs!

(*) A nice example for you. When Barrick Gold bought Randgold, my position went from being GBP denominated to being CAD denominated. The cost basis carried over exactly, so that my cost basis of 10K sterling was shown as 10K Canadian dollars!

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Re: Calculating CGT on shares after merger

#432971

Postby scrumpyjack » August 6th, 2021, 5:24 pm

I have paid huge amounts of CGT over the years, but generally have not minded, as they were mostly real gains (as opposed to inflation 'gains') and took the view that one should not let the tax tail wag the investment dog and that it is fair that the state charges reasonable levels of taxation on real capital gains (but not on ones that simply reflect the devaluation of the currency!). The largest amounts were in takeover situations for cash, so it was completely unavoidable, but also on other occasions where I have felt it right to sell a share, I haven't let CGT stop me.

Currently I am dithering about the Prudential situation where those idiots at Goldman Sachs have structured the Jackson demerger so it is treated for UK taxpayers as a dividend (of about 200 to 230p per Pru share). So I either pay huge amounts of income tax on that or sell the Pru holding before the demerger and pay CGT instead (the SP is about 5 times my acquisition cost) .

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Re: Calculating CGT on shares after merger

#433001

Postby Lootman » August 6th, 2021, 7:11 pm

scrumpyjack wrote:Currently I am dithering about the Prudential situation where those idiots at Goldman Sachs have structured the Jackson demerger so it is treated for UK taxpayers as a dividend (of about 200 to 230p per Pru share). So I either pay huge amounts of income tax on that or sell the Pru holding before the demerger and pay CGT instead (the SP is about 5 times my acquisition cost) .

At least with investment trusts, when there is a corporate action then in my experience there is almost always a rollover option, meaning that no immediate CGT liability need arise. That is a big part of why I am comfortable holding ITs in a taxable portfolio but less happy about ordinary shares.

The OP's example was of course a corporate action involving ITs.

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Re: Calculating CGT on shares after merger

#433056

Postby GeoffF100 » August 7th, 2021, 8:11 am

Lootman wrote:At least with investment trusts, when there is a corporate action then in my experience there is almost always a rollover option, meaning that no immediate CGT liability need arise.

I believe that Global Investment Trust, which was the largest at the time, was bought out by a pension fund.

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Re: Calculating CGT on shares after merger

#433061

Postby Lootman » August 7th, 2021, 8:39 am

GeoffF100 wrote:
Lootman wrote:At least with investment trusts, when there is a corporate action then in my experience there is almost always a rollover option, meaning that no immediate CGT liability need arise.

I believe that Global Investment Trust, which was the largest at the time, was bought out by a pension fund.

It was Globe Investment Trust, at the time the largest IT and a component of the FTSE-100.

I could be wrong but I believe there may have been an option to rollover to an open-ended fund. Although it was a long time ago and I do not remember clearly.

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Re: Calculating CGT on shares after merger

#433634

Postby daveh » August 10th, 2021, 9:30 am

scrumpyjack wrote:
Currently I am dithering about the Prudential situation where those idiots at Goldman Sachs have structured the Jackson demerger so it is treated for UK taxpayers as a dividend (of about 200 to 230p per Pru share). So I either pay huge amounts of income tax on that or sell the Pru holding before the demerger and pay CGT instead (the SP is about 5 times my acquisition cost) .


I know, annoying. The MNG demerger was a capital event and the base cost was apportioned between the two holdings in line with the first day closing prices. Can't see why it couldn't have been done that way for Jackson (maybe the difference is that its not listed on the FTSE).

I bit the bullet yesterday and did a bed and ISA. Didn't want to sell PRU yet as I don't think the full value of the Jackson holding is factored into the PRU price yet. I wasn't certain if the "dividend" of the Jackson shares will take me over the £2000 dividend allowance, but it might depending on the price of the Jackson shares and on how many of my other taxable holdings resume dividends this year. The capital gain from the PRU sale should be within the CGT allowance as long as I'm not forced to make any more gains this year. I plan to make use of the immediate sell facility for the Jackson shares as I don't want to hold any US shares to avoid any complications with documentation for holding US shares.


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