ETFs, ERI, capital gains base and sales - maybe partial

[EthicsGradient]

I have made a partial sale, from a general account (ie not a SIPP or ISA) of a holding in an (accumulation) ETF - in the period between the end of the ETF's accounting year, and the point 6 months later when the ERI is revealed, and the ERI is held to be taxable, based on the number of shares held at the end of the accounting year - but it can be listed as a cost that adjusts the base for capital gains calculations.

The general concept seems to be that the ERI is subject to income tax, 6 months after the end of the accounting year, but that, like an accumulating OEIC, is treated like an extra purchase at that point. So I'd think the tax treatment, using an illustration, should be like:

2000 shares bought @ £30 each "a long time ago" (this may be one original purchase, or the purchase plus various ERI of past years);
31st Dec 2021: end of accounting year
1st May 2022: 600 shares sold @£40.
30th June 2022: ERI of £1.20/share declared.
30th June 2022: taxable income of £1.20*2000=£2,400 arises
CGT calc: since the 600 shares were sold before the ERI arose, that ERI does not affect the cost basis of that sale. So that is:
600 shares bought @£30=cost of £18,000; CG = £24,000 - £18,000 = £6,000
cost basis of remaining 1400 shares = 1400*£30 + £2,400 = £44,400 (or £31.71/share)

But then, what if I had sold the entire holding - and had sold it in the 2021-22 tax year? At the end of that 2021-22 tax year, I'd need to work out the capital gain, but couldn't, until that ERI was declared in June 2022 - and does that then become allowable as part of the cost basis of the sold shares after all - when, in the calculation above, I made it all part of the cost basis of the shares still held on 30th June?

Yes, I know now that ERI is a pain in the **** for tax calculations. But it's too late to say "only buy ETFs in a tax sheltered account, to keep yourself sane". Does that calculation above make sense? Or should the ERI, when known, be split, for the cost basis, between the 600 shares sold, and the remaining 1400?

[test]

I own ETFs (accumulation) outside of tax shelters, and occasionally have a similar dilemma.

In the example given I would declare the dividend as received in the 2022/23 tax year. However for CGT purposes the ERI due on 30 June 2022 would be included in the cost of the shares when selling on 1st May 2022, therefore

Total Expense: 2000 shares @ £31.20 = £62400
Partial cost: 600/2000*£62400 = £18720
Sale: 600 shares @ £40 = £24000
Capital gain: £24000 - £18720 = £5280
New cost of remaining 1400 shares: £62400 - £18720 = £43680

To the best of my knowledge a partial sale is treated in the same way as a full, and you just have to wait to receive the ERI information before completing the CGT pages on your tax return.

[EthicsGradient]

I have also asked this question on the Money Savings Expert forum, and have been helpfully pointed to this HMRC internal manual: https://www.gov.uk/hmrc-internal-manual ... s/ifm13372

UK investors will have been charged to tax under regulations 94 to 98 on income distributed by a reporting fund, and on any excess of reported income arising under regulation 94. To avoid a double charge to tax, any sums specified under regulation 94 are treated as expenditure given for the acquisition of the asset, and as allowable as acquisition costs arising under section 38(1)(a) TCGA 1992. See IFM13373 for examples of how this works.
...
Sums treated as expenditure in this way are treated as incurred on the fund distribution date for the reporting period in respect of which the amount is treated as distributed. (See IFM13222 for the date taken as the fund distribution date).

Where a participant receives an amount in respect of an interest in a reporting fund which is chargeable to tax as income but that amount is received (or treated as received) after the date of the disposal of the interest the amount is treated as received immediately before the disposal for the purposes of regulation 99.

In that final paragraph, does "an interest" and "the disposal of the interest" mean only an entire holding (2000 shares in the example), and when that is completely sold - in which case I think, for a partial disposal, my calculation would apply; or could the 2000 shares be said to be two "interests" - one of 600 shares which is sold, and one of 1400 shares which is retained, in which case test's calculation is the one to use?

[FigNewton]

Am I correct in thinking I can avoid ERI by selling my fund holdings just before the end of the fund financial year and then rebuyıng afterwards? Thereby all my gains will be taxed as capital gains tax rate, rather than at my marginal income tax rate or dividend tax rate? I am thinking of CSH2 ETF an accumulation fund that tracks SONIA. As this ETF has a price that increases quite smoothly, I will actually make a small capital gains loss when repurchasing as that will be the basis cost for the sale 2 days previous.