‘Will working out 37 years of capital gains taxes be an impossible nightmare?’

Email your tax questions to Mike via email: taxhacks@telegraph.co.uk

Dear Mike,

I have two questions relating to capital gains tax.

Firstly, I need to tidy up my investments and want to sell one of my unit trust holdings in full. In 1987 I bought accumulation units, in what is now the Janus Henderson Asia Pacific Capital Growth fund, at a cost of £1,000. They are now worth £10,700. 

Although the income has always been declared, it is reflected in the share price of the fund. Most of my other holdings have extra units purchased with the income but that is not the case here. The number of units I hold does not change at each distribution, so working out the capital gain over many years is going to be difficult.

Clearly, if I sell the whole holding the gain will be more than the CGT allowance of £6,000 – but this takes no account of the fact that the share price includes the income generated. I wonder therefore what the calculation should be.

I phoned the Janus Henderson client services team and they were no help at all. The person could not answer my question about capital gains on accumulation units and referred me to the gov.uk website.

The fund documentation says: “For accumulation shares any income available for distribution is not paid out, but is retained in the fund and transferred from the income account to the capital account. The income is therefore reflected in the share price of the fund and for this type of share the amount shown as total income accumulation is deemed to have been paid and constitutes income.” 

The dividend voucher says: “This tax voucher should be retained for future reference when completing UK tax returns.”

I have another holding also bought in 1987 at a cost of £4,000 which is now valued at £47,000. In this case the dividend is used to buy extra units. The number of units was originally 8,000 and is now 31,000. I suppose the correct calculation would be to work out the gain on each purchase but that would be a huge task, perhaps impossible. I wonder what would happen in this situation.

Mike

Dear Mike,

When you buy or add to a holding of shares or unit trust units of the same class, the cost is added to your total cost, referred to as the pool. This is the amount that will be taken off the proceeds to calculate your CGT when you sell your entire holding.

Where dividends are declared and used to buy extra units rather than paid in cash, you correctly reported the dividends to HMRC as dividend income. The value of these dividends is added to your overall pool of costs.

This treatment will apply to the second situation you mentioned. The fund managers should have a record of all the dividends declared and it is worth asking whether they also have records for your holding. Otherwise I regret that it will be a matter of going through all your records to establish the base cost of the units. Record keeping over many years is a pain but probably worthwhile.

Your first question is less usual because you say that even though you are issued with a tax voucher that you declare to HMRC, no additional units are issued to you. Fortunately we have legislation that deals with these circumstances to prevent double taxation.

These rules are explained in HMRC tax manual CG14300 as follows: “Interaction with other taxes: Sums chargeable as income (TCGA92/S37). Any part of the consideration for disposal of an asset which has either been charged to tax as income, or taken into account in computing income, should be excluded from the consideration for the disposal of the asset in computing the chargeable gain or allowable loss.”

Although I cannot be sure without seeing the technical documentation from Janus Henderson, the result should be that you will be given relief for the amounts you have declared as dividends. This would either be as an addition to the base cost or as a deduction from the proceeds, but the result is the same.

Unfortunately this situation is likely to arise more frequently with the reduction of the CGT annual exemption from £12,300 to £6,000 this year and worse again when it falls to £3,000 next year. The tax rate on any resulting gain will be 10pc within your basic-rate band and 20pc otherwise.

Remember that if you have a spouse or civil partner you can transfer units to them without CGT liability; they take over your base cost. They can sell units to utilise their annual exemption and any basic-rate tax band.