Policy paper

Statement of Practice 2 (1999)

Published 1 April 1999

Introduction

1. This Statement of Practice explains where HM Revenue and Customs (HMRC) will accept simplified Capital Gains Tax computations from individuals who have disposed of shares or units in investment funds which they acquired through monthly savings schemes before 6 April 1999. The investment funds concerned are authorised unit trusts (AUTs), approved investment trusts (AITs), and open-ended investment companies (OEICs) incorporated in the UK. For Capital Gains Tax purposes, each sub-fund of an AUT which is an umbrella scheme is regarded as an AUT in its own right, and the umbrella scheme itself is not regarded as an AUT. Similarly, each sub-fund of an OEIC which is an umbrella company is regarded as an OEIC in its own right, and the umbrella company itself is not regarded as an OEIC.

2. Where taxpayers ask for the practice to apply, the number of calculations needed to determine their Capital Gains Tax liabilities for the units or shares they acquired through their savings scheme which qualify for indexation allowance will be substantially reduced. This statement does not affect the rights of taxpayers who wish to submit computations made on the normal statutory basis.

3. Although the statement covers a wide variety of circumstances, its basic approach is simple. It applies where an investor saves a fixed sum each month and makes no withdrawals, or only relatively small withdrawals. In these cases, the total of an investor’s monthly investments in the fund during its accounting year will be added to the total of any distributions or other allocations of income which are reinvested in the fund on their behalf in the accounting year. Any small withdrawals made in that accounting year will be deducted. The resulting figure will be treated for Capital Gains Tax purposes as if it had formed a single investment made on the date on which the seventh monthly investment is made. Suppose, for example, an investor in an AUT saves £50 on the seventh of each month, that no distributions or other income allocations are reinvested in the fund on their behalf, and that the AUT has an accounting year ending on 31 December. Capital Gains Tax computations will be made as if the taxpayer had made a single investment of £600 on 7 July. As a result, only one computation will be needed for the investments in the fund in that year, instead of 12.

Who can ask for this practice to apply?

4. Individuals who entered before 6 April 1998 into a monthly savings scheme to invest regular monthly sums in an AUT, AIT or OEIC, and dispose of investments on or after 6 April 1988. The practice can be applied in respect of monthly sums invested during those accounting years of the fund concerned which ended before 6 April 1999. The practice cannot be applied in respect of monthly sums invested during accounting years which end on or after 6 April 1999, and the Capital Gains Tax computations for investments made in those periods must be calculated on the normal statutory basis.

5. The appendix at the end of this statement provides an example of a Capital Gains Tax computation where the disposal in question is made by an investor some years after 6 April 1999 of income units in an AUT which were acquired through a savings scheme that began before 6 April 1998. The example illustrates how the practice is used for the period for which it is applicable, and how the computations are made for the period for which the practice does not apply.

How should the taxpayer make the request?

6. Taxpayers must write to their HM Revenue and Customs Office not later than 12 months after 31 January following the end of the first tax year in which they dispose of units or shares acquired via monthly savings schemes and:

  • the resulting gains, together with any other gains made in the year, exceed the capital gains annual exempt amount for that year
  • the disposal proceeds together with the proceeds of their other disposals exceed twice the annual exempt amount
  • their other disposals in the year give rise to net losses

7. Where a taxpayer has monthly savings schemes in more than one AUT, AIT or OEIC, applications for this practice to apply should be made separately for each trust or company. Where a taxpayer has more than 1 monthly savings scheme in the same AUT, AIT or OEIC, the application will cover all those schemes, and this practice will apply as if they formed a single scheme.

8. Some savings schemes allow an investor to make a single monthly payment which is split between different trusts or companies. If so, the statement will apply as if there were separate savings schemes for each trust or company concerned. Thus, an investor who saves £200 a month, with £100 allocated to XYZ Growth Unit Trust and £100 to XYZ Income Unit Trust, will be treated as having 2 separate schemes for £100 a month each.

9. Some savings schemes allow investors to vary the fund in which their monthly contributions are invested. An investor who changes the fund in which his or her contributions are invested will be regarded for these purposes as having ceased contributing under 1 savings scheme and having started a new scheme. This treatment also applies in cases where investors switch their contributions between different sub-funds of an umbrella AUT or OEIC.

What will the simplified computation apply to?

10. The rules described below will apply in calculating the gain on the disposal of units or shares in the year of assessment to which the application relates. Where the disposal is a part-disposal, the rules will also apply in determining gains on later disposals of units or shares acquired via the savings scheme, subject to the taxpayer’s right to revert to the statutory basis. A taxpayer who has exercised his or her right to revert to the statutory basis for a particular savings scheme may not benefit for a second time from the simplified rules for that scheme.

11. Some taxpayers may have units or shares in a monthly savings scheme for a particular AUT, AIT or OEIC and other units or shares in the same AUT, AIT or OEIC which are acquired by, for example, separate lump sum investment. The practice described in this statement will apply only to the units or shares held in the monthly savings scheme. Any gain on units or shares acquired in other ways will be computed according to normal capital gains rules as if those units or shares formed a holding separate from those acquired through the monthly savings scheme.

The approach of the simplified computations

12. The general approach treats all investments and withdrawals made in a year during the lifetime of the savings plan as though they were made in a single month of that year.

13. The year will correspond to the accounting year of the fund. This may not always be exactly 12 months, because for some funds the date to which accounts are drawn up varies slightly from year to year. For example, the accounting date may be set as the second Thursday in November (irrespective of the day of the month on which it falls). Apart from such small variations, special rules will apply when the accounting date is changed. These are described later.

14. In the straightforward case where an investor makes regular monthly contributions throughout the accounting year, investments and withdrawals will be treated as made on the day on which the seventh monthly investment in the accounting year is due. The calendar month in which that day falls is referred to in this statement as ‘the seventh month’.

15. Where distributions are automatically reinvested to acquire further shares or units, or where the investor uses the savings scheme to acquire accumulation units in an AUT or accumulation shares in an OEIC, the distribution or allocation of income will be treated as invested on the day on which it is credited to the trust or company on the investor’s behalf. No adjustment will be made for equalisation. The day on which the investment is treated as made for the final distribution in the accounting year of the trust or company will be determined as follows:

  • in cases where distributions are automatically reinvested in the trust or company to acquire further units or shares on the investor’s behalf, the final distribution for an accounting year will be credited after the end of that accounting year - this means that final distributions for an accounting year will be regarded for these purposes as reinvested in the following accounting year
  • in the case of accumulation units or shares, on the other hand, the final allocation of income in respect of an accounting period becomes part of the capital property of the AUT or OEIC concerned with effect from the end of the accounting year in question

Example 1

a. An accounting year starts on 1 January 1996.

b. The taxpayer subscribes £100 a month throughout the accounting year in income units in an AUT, on the sixth of each month.

c. The final distribution for the accounting year ending on 31 December 1995 is £25, the interim distribution for the new accounting year is £27, and the final distribution for the new accounting year is £30. The distributions are automatically reinvested in the AUT to acquire further units on the taxpayer’s behalf.

In calculating the indexation allowance, the taxpayer will be treated as having made a single investment of £1,252 on 6 July 1996.

Example 2

a. An accounting year starts on 1 January 1996.

b. The taxpayer subscribes £100 a month in accumulation shares in an OEIC throughout the accounting year, on the sixth of each month.

c. The final distribution for the accounting year ending on 31 December 1995 is £25, the interim distribution for the new accounting year is £27, and the final distribution for the new accounting year is £30.

In calculating the indexation allowance, the taxpayer will be treated as having made a single investment of £1,257 on 6 July 1996.

Example 3

a. An accounting year starts on 20 January 1995 and ends on 19 January 1996.

b. The taxpayer subscribes £100 a month throughout the accounting year in shares in an AIT, on the sixth of each month.

c. The final distribution for the accounting year ending on 19 January 1995 and the interim distribution for the new accounting year are £50 in aggregate and are automatically reinvested in the AIT to acquire further shares on the taxpayer’s behalf.

The first monthly contribution in the new accounting year is made on 6 February 1995, and the seventh on 6 August 1995. In calculating the indexation allowance, the taxpayer will be treated as having made a single investment of £1,250 on 6 August 1995.

Pre-1982 holdings

16. When calculating Capital Gains Tax and indexation on the statutory basis, pre-1982 holdings (acquisitions made on or before 31 March 1982) are treated as a separate pool from the post-1982 pool (acquisitions between 1 April 1982 and 5 April 1998). This will also apply for the purposes of the special treatment provided by the practice described in this statement. Indexation will be calculated for 2 separate pools and any withdrawals will be treated as disposals of units or shares from the post-1982 pool first, and when that is exhausted, from the pre-1982 pool. This is in accordance with the existing last-in, first-out rules. The practice will not apply to the pre-1982 holding. Where an accounting year straddles 31 March 1982, the practice will apply as if regular saving began in April 1982, in accordance with paragraph 17 below. It will not apply to investments and withdrawals up to 31 March 1982.

First year of investment

17. Where an investor begins regular saving part-way through an accounting year, his or her investments and any withdrawals in that period will be treated as made on the date of the last monthly contribution in the accounting year.

Final year of monthly saving

18. In the accounting period in which regular monthly saving stops, investments will be treated as made on the date of the last regular contribution or, if earlier, in the seventh month.

One-off extra savings

19. An investor may sometimes make extra payments into his or her savings scheme in addition to the regular monthly commitment. If, in any month, the extra payment is not more than twice the regular monthly commitment, it will be treated in the same way as the regular monthly savings (and so, in the normal case, as if it were made in the seventh month). If the extra payment exceeds twice the monthly commitment, it will be treated as made in the calendar month in which it is actually made.

20. In some AITs, arrangements for one-off savings are kept separate from the monthly savings schemes. Where that happens, the practice will not apply to shares acquired by one-off savings.

Increases in monthly savings level

21. Some investors may increase their monthly savings commitments. If the increase occurs after the seventh month in an accounting year, the extra savings will be deemed to be made at the beginning of the next accounting year, and indexation, where available, runs from the seventh month for that following year.

Example 4

a. The accounting year coincides with the calendar year, so that the seventh month is July.

b. From January to August 1990, the taxpayer saves £50 a month.

c. From September 1990, the taxpayer saves £100 a month.

d. The final distribution for 1989, which is automatically reinvested, is £50. There is no interim distribution.

The taxpayer will be deemed to have made a single investment of £650 in July 1990. The extra £200 invested between September and December 1990 will be deemed to be invested in January 1991, and added to the investments made in 1991. Indexation will be given on this amount from July 1991 until April 1998.

Withdrawals and part-disposals

22. Savings schemes often allow taxpayers to make withdrawals. Where the withdrawals in any accounting year do not exceed a quarter of the total amount of regular savings made in that accounting year, the withdrawal or withdrawals will not be treated as involving a disposal, but the amount invested in the accounting year will be reduced by the amount withdrawn.

23. Where withdrawals in any accounting year exceed a quarter of the total amount of regular savings made in the accounting year, the practice does not apply to savings made in that year. However, provided the necessary conditions are satisfied, the practice applies to earlier and later accounting years.

24. Under some AIT savings schemes, an investor wishing to realise part of a holding has to make his or her own arrangements to sell the shares because the scheme does not offer a facility to dispose of shares. In such cases, the practice will apply to part-disposals of shares acquired via the scheme in the same way as to withdrawals. If at the time of a disposal prior to 6 April 1998 the investor also has shares acquired outside the scheme, the disposal will be treated, so far as possible, as being of those other shares. For disposals after 5 April 1998, the normal Capital Gains Tax rules apply to identify the shares which are disposed of.

Part disposals before 6 April 1988

25. Where there was a part disposal before 6 April 1988 and the gain either was assessed or would have been calculated on the statutory basis under paragraphs 23 or paragraphs 27 of this statement had the practice applied at the time, the simplified rules will apply to investments and withdrawals made from the start of the accounting year following the accounting year in which the last such part disposal took place.

Short-term investors

26. This practice does not apply where fewer than 7 months’ regular savings are made.

Missed months

27. Some savings schemes allow taxpayers to miss a month of regular saving. This practice will apply in the normal way to any accounting year in which the taxpayer misses only 1 regular payment. If more than one payment is missed in an accounting year the practice will not operate for investments and withdrawals in that accounting year. However, if the necessary conditions are satisfied, it will apply for earlier and later accounting years.

Non-standard periods of account

28. Sometimes an AUT, AIT or OEIC may draw up accounts for a period which is less than, or greater than, a year. This will often apply for the first accounting period, and a non-standard period of account will also arise if the accounting date is changed. In these circumstances, special rules apply:

a. if the period of account is less than 7 months, investments and withdrawals will be treated as made on the date of the last regular contribution in the period.

b. if the period is at least 7 months but does not exceed 12 months, investments and withdrawals will be treated as made in the seventh month (as defined in paragraph 14 above).

c. if the period exceeds 12 months, it will be subdivided. The first 12 months will be treated as if they formed an accounting year, and investments and withdrawals in them will be treated as made in the seventh month. Investments and withdrawals in the remainder of the period will be treated as made on the date of the last regular contribution in the period

These special rules will not apply where there is a change of accounting date in accordance with a routine formula which merely reflects a variation of the kind referred to in paragraph 13.

Loss of approved investment trust status

29. Investment trusts have to be approved each year by HMRC. This practice will not apply for an accounting period for which approval is not obtained. But, provided the necessary conditions are satisfied, it will apply for earlier or later periods for which approval is given.

Interaction with years of assessment

30. An accounting year is unlikely to coincide with a year of assessment. When a taxpayer completes their return it may not yet be certain that all the conditions for the operation of this practice will be satisfied for the accounting year straddling the end of the year of assessment concerned. In such circumstances, the return should be completed on the assumptions that:

a. monthly savings will continue at the level applying at the end of the year of assessment and

b. there will be no withdrawals or one-off extra savings in that part of the straddling accounting year which falls after the year of assessment.

31. The treatment described in paragraph 22 above can be applied only if withdrawals in that part of the straddling accounting year which falls within the year of assessment concerned do not exceed total savings in that part of the straddling accounting year. If it turns out that the conditions for the practice to apply are not, in fact, satisfied in the second part of the straddling accounting year, the treatment of any investments and withdrawals made in the earlier part of the straddling accounting year will not be disturbed.

Transfers or mergers of funds

32. An investor may enter into a monthly savings scheme with an AUT, AIT or OEIC whose business is later transferred to, or merged with, another trust or company. On the transfer or merger the investor’s old units or shares will generally be cancelled, and replaced with units or shares in the new trust or company. Where Taxation of Chargeable Gains Act (TCGA) 1992 section 136 applies in such cases the investor is treated for Capital Gains Tax purposes as not disposing of his or her original units or shares, or acquiring replacement units or shares in the new trust or company. Instead, the new units or shares are treated as having been acquired at the same times, and for the same amounts, as the original units or shares.

33. If, where TCGA 1992 section 136 applies to the investor’s holding on the transfer or merger, the investor continues to make the same regular monthly payments to the new fund, this practice applies as though no transfer or merger had taken place. The new trust or company may, however, have a different accounting date from the old trust or company. If so, the period from the last accounting date of the old fund, to the next accounting date of the new fund, may - so far as the investor is concerned - be treated simply as a non-standard period of account to which paragraph 27 above applies in relation to the continuing contributions. If, on the other hand, TCGA 1992 section 136 does not apply on the transfer or merger, the investor is treated as disposing of his or her units or shares for Capital Gains Tax purposes, and starting a new scheme with the new trust or company at that time. In such cases paragraphs 18 and 17 of the statement will apply instead.

Use this link to view the appendix.