“Conversion, exchange, switch”.

Is this the financial sector’s version of “rock, paper, scissors ” ..or “ik, ak, ok” as I used to say as a child when playing this game with friends many years ago.

Well, no..it was just the use of three words that brought the thought to mind. How juvenile!

But the three words that open this blog and their impact in relation to capital gains tax have been causing a bit of consternation to those engaged in the move to “clean” share classes.

The latest confusion may not have been helped by some HMRC guidance. They say :

“Will there be additional tax liability as a result of switching to “Clean” Share Classes

Under new regulations (SI 2013/1400) it is expected that it will be clear that switches to ‘clean’ share classes will not create a liability to capital gains tax.

Prior to 8 June 2013 most switches took place as part of a reorganisation or reconstruction and would also not create a liability to capital gains tax. The new regulations provide further clarification on the matter and widen the treatment to cover cases of switching that might not have fallen within the previous rules including switches undertaken on behalf of and at the instance of an individual investor.”

So what does this mean ? Well, its not so much the word that you use to describe the way in which you move to a clean share class but more what you actually do.

The draft regulations talk in terms of ‘exchange’, not switch and I ( having taken guidance from better people than me in the TC team) continue to think that anything involving a ‘sale’ is clearly not an exchange, reorganisation, reconstruction or conversion.

As we said in our Techlink bulletin on the subject:

“The key part of these regulations is that CGT will not arise where:

  • An investor in a collective investment scheme exchanges his shares/units in a scheme for other shares/units in the scheme “of substantially the same value” and the scheme property and rights of investors (ignoring any changes as a result of a variation in management charges) are unaltered;
  • Where a scheme reorganises in a way that all investors in one or more unit/share class (or all classes) exchange their holdings for other shares/units in the scheme.

 The exchange is treated for CGT purposes as a share reorganisation under sections 127-131 of Taxation of Chargeable Gains Act 1992 – in effect the original base cost is carried across to the new holding and no disposal occurs.

 Note that the word used throughout the regulations is ‘exchange’, not ‘switch’. A switch – generally considered in terms of a sale and purchase – would not be covered by these regulations because the sale would be a disposal, even if the repurchase was of a different class of units/shares in the same fund.”

Of course if what is described as a “switch” is , in fact an exchange, with no sale and disposal , then it seems to me that there would be no CGT event.

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