In 2024/25, Tina realises a chargeable gain of £22,000. She has taxable income of £19,585 after allowances. Taxable gain = £19,000 (£22,000 - £3,000). £18,115 x 10% = £1,811.50 (£18,115 = £37,700 - £19,585) £885 x 20% = £177 (£885 = £19,000 - £18,115) Total CGT payable = £1,988.50 |
Investments & Taxation
Authorised Investment Funds for individual investors: planning ideas
Last Updated: 6 Apr 24 8 min read
An Authorised investment fund is a type of regulated and authorised collective investment scheme.
Key Points
- AIFs do not pay tax on capital gains and instead the investor is potentially liable to CGT on disposal of shares.
- Unit trusts and OEICs allow investors access to professionally managed portfolios by pooling their assets.
- They can be held by individuals, trustees and companies with a huge range to choose from allowing portfolio diversification.
How AIFs are set up legally
Authorised investment funds (AIFs) may be constituted under two different legal forms:
- Authorised unit trusts (AUTs), and
- Open-ended investment companies (OEICs)
An investor may therefore own units or shares in an AIF. For the remainder of this article, the terms 'unit' and 'unit holder' should be read as equally referring to 'share' and 'shareholder' in an OEIC.
As explained in Authorised Investment Funds (AIFs) for Individual Investors AIFs do not pay corporation tax on chargeable (i.e. capital) gains. Instead, the investor is potentially liable to capital gains tax (CGT) on disposal of shares or units.
Rates and annual exemption
The rates for CGT in 2024/25 applying to individual AIF investors are:
- 10% for individuals where total taxable gains and income are less than the upper limit of the basic rate band (£37,700+£12,570 = £50,270)
- 20% for individuals in respect of gains (or any part of gains) above that limit.
Autumn Statement 2022 confirmed that the Personal Allowance and higher rate threshold of £12,570 and £50,270 respectively will remain at these levels until 5 April 2028. Spring Budget 2021 originally froze these amounts through to just 5 April 2026.
Autumn Statement 2022 announced that the Capital Gains Tax Annual Exempt Amount will reduce from its 2022/23 level of £12,300 to £6,000 from April 2023 and to £3,000 from April 2024. No claim is required for the annual exemption. Any unused exemption may not be carried forward.
The Scottish and Welsh rates of income tax applies to non-savings and non-dividend income – the personal allowance and thresholds and taxes on savings and dividends remain a UK ‘reserved’ matter.
CGT has not been devolved (nor NIC, IHT or corporation tax).
With regard to dividends received from an equity OEIC, note that the dividend ‘allowance’ was reduced in Autumn Statement 2022. In 2022/23 it was £2,000 but reduced to £1,000 effective from 6 April 2023 and then £500 from 6 April 2024. This is exacerbated by fact that the 1.25% dividend tax increases for 2022/23 are to be maintained in 2023/24 and 2024/25.
- Dividends in basic rate 7.5% + 1.25% = 8.75%
- Dividends in higher rate 32.5% + 1.25% = 33.75%
- Dividends in additional rate = 38.1% + 1.25% = 39.35%
Basic principles
Chargeable gains (or allowable losses) accrue on the disposal of assets. The word 'disposal' is not expressly defined in the Taxation of Chargeable Gains Act (TCGA) 1992, so must be given its natural meaning. Sales and gifts are both examples of natural disposals. Gifts to children, for example, may therefore give rise to a CGT charge. Similarly, gifts to trustees can create a CGT liability although 'hold over relief' may be available (S260 TCGA 1992) in certain situations. This is a complex area requiring professional advice. Note however that certain disposals are no gain / no loss disposals, where the asset is treated as passing from the transferor to the transferee at a value which results in neither a gain nor a loss accruing to the transferor. For example:
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The result is that the recipient will inherit the asset's CGT 'history'.
The exemption for inter-spouse transfers can be used to ensure that gains are realised by the partner with the lower marginal CGT rate.
Neither indexation allowance nor taper relief apply to disposals of assets by individuals on or after 6 April 2008.
Calculating the gain
In broad terms a 'capital gain' is the amount by which the disposal value of a chargeable asset exceeds its acquisition value. Certain incidental costs (e.g. dealing fees, stamp duty reserve tax) are also deductible.
Where a chargeable asset is gifted (ie not a bargain at arm's length), the person making the gift is treated as disposing of the asset at market value, unless it is a no gain / no loss transfer.
Identifying units being sold
S99 TCGA 1992 treats units in a unit trust as though they were shares in a company. The normal CGT rules which apply to shares apply to units in a unit trust.
One feature of shares is that unless they are numbered, and most shares are not, all shares of the same class in the same company are identical. The problem this causes can be illustrated quite easily.
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To work out the capital gain it is necessary to know which units Alan sold and how much they cost.
Special 'share pooling' rules exist to deal with this problem.
Shares of the same class in the same company acquired at any time by a person in the same capacity will normally become part of the 'Section 104 holding'. The Section 104 holding is simply the share pool. However, shares that are identified with acquisitions under the 'same day' or 'bed and breakfasting' identification rules do not become part of the pool.
The Section 104 holding is a pool of qualifying expenditure as regards the number of shares in the holding.
The pool grows whenever further shares are acquired that enter the pool and reduces when there is a disposal of shares from the pool (shares identified in accordance with the first two bullet points below do not enter the S104 holding).
Legislation provides that disposals must be identified in the following order:
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Applying these rules to the above example of Alan produces the following result:
Section 104 Holding - before disposal
Date |
Number |
Cost |
Total |
|---|---|---|---|
| 2007 | 1,000 | £2.50 | £2,500 |
| 2013 | 500 | £4.00 | £2,000 |
| 5 April 2024 | 1,500 | £3.00 | £4,500 |
2024/25 CGT computation
Proceeds |
250 X £5 |
£1,250 |
|---|---|---|
| Cost | 250 x £ 3 | (£750) |
| Gain | £500 |
Section 104 Holding - after disposal
Date |
Number |
Cost |
Total |
|---|---|---|---|
| 5 April, 2024 | 1,500 | £3.00 | £4,500 |
| Disposal | (250) | (£750) | |
| 5 April 2025 | 1,250 | £3.00 | £3,750 |
Anti-avoidance rules
Matching disposals against acquisitions on the same day and against acquisitions within the 30 days following the disposal are anti-avoidance rules to counter the practice of selling and buying back shares shortly afterwards simply to realise a gain, and increase the base cost for future disposals (or simply to realise an allowable loss). This works as follows:
Example
Alison has 9,500 units in her Section 104 holding
- 30 August 2024 – sells 4,000 units
- 12 Sept 2024 – purchases 500 units
Her disposal of 4,000 units is identified as follows:
- 500 against units purchased on 12 Sept 2024 under the 'bed and breakfasting' rule.
3,500 against the shares in the Section 104 holding
Planning
The 'bed & breakfasting' anti-avoidance rules do not apply in the following situations:
- Repurchase after 30 days
- Repurchase of a non-identical fund
- Repurchase made by spouse
Repurchase within an ISA or pension
Losses
An individual is assessable to CGT on his or her total chargeable gains for the year of assessment reduced by:
- allowable losses
- the AEA.
The treatment of losses depends on whether they are:
- losses of the same year of assessment as the gains
- losses of earlier years of assessment.
The procedure is as follows:
1. Deduct any allowable losses accruing in the year of assessment from gains made in that same year – – even if the net chargeable gains fall below the AEA (losses which cannot be set against gains of the same year of assessment are carried forward and set against gains which arise in the future).
2. If the net gains under 1. above are more than the AEA and there are unused losses brought forward from a previous tax year then deduct those losses, but just enough to reduce the net gains to the AEA limit.
3. If there are still unused losses from a previous year after they have reduced gains to the AEA, they can be carried forward to future years.
Example 2024/252023/24 – Joan made losses of £24,000 which have been carried forward. 2024/25– Joan made gains of £25,000 There are no losses arising in 2024/25 to set off against the gains Gains in 2024/25 exceed the AEA and therefore unused losses brought forward can be used to reduce the gains to £3,000 (£25,000 less £22,000 = £3,000) Unused losses to be carried forward to 2025/26 and beyond = £2,000 (£24,000 less £22,000) |
Planning aspects with losses
There is no point – from a tax perspective – in crystallising a loss when net gains in that same year of assessment are within the AEA.
Losses crystallised in a year of assessment in which there are no gains will allow the full amount to be carried forward.
If one spouse or civil partner has realised gains in excess of the AEA and the other spouse has uncrystallised losses, consider an exempt inter-spouse transfer followed by a disposal.
Losses in the year of death
As noted above, capital losses that can’t be used in the year of assessment in which they arise may normally only be carried forward. There is an exception, however. If an individual incurs capital losses in the year in which he or she dies, those losses must first be set against gains of the same year (even if this reduces the net figure below the AEA). Any surplus can be set against gains of the three preceding years – allowed against the gains of a later year before gains of an earlier year.
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