Tax Talk: Excluded Indexed Securities & Tax Reporting for 2022-23

It has been – to keep it professional – a bonkers few months. A Budget, a new tax return requirement, changing working practices at FSL, and of course, the tax reporting season for 2022-23.

Here’s a little blog post from me (Alex) on how things have been going behind the scenes at FSL.

 

Excluded Something-or-Others

Apologies to anyone who has been in a room or on a call with me during the last four months, but the most important news is that HMRC have created a new box on the tax return for gains on Excluded Indexed Securities. Have a read about how we’ve responded to this here.

I gave myself a little pat on the back for spotting it back when the new requirement was published. Subsequent conversations with contacts across both the tax and wealth management industries have left me convinced that I could have probably been even prouder of myself. Why? Because very few were aware of the new box or how it would affect clients.

One underrated aspect of the whole affair has been the very basic problem that an awful lot of people, including qualified tax professionals, simply don’t know what Excluded Indexed Securities are. Now, this is not to say that we are fantastically smart and much better than everyone else (although Michael’s telling me I should absolutely say that) but that they are simply not a matter that comes across many people’s desks.

So, what is an Excluded Indexed Security? It’s a security whose redemption proceeds on maturity are tied to the value of an underlying asset, whether that be gold, a share in a listed company, or even an index like the FTSE 100.

It is no exaggeration to say that everyone in FSL has helped get the new functionality into CGiX in one way or another, and we’re all very proud of the result. If you are a client of ours already, you can get yourself onto the timeline of upgrades by talking to your contact on the FSL Business Analysis team.

I will be writing more on this subject in the near future, because who doesn’t still want to read about Excluded Indexed Securities? Stay tuned.

 

Agile, scrum master, product owner, sprints…  Is that enough SEO terms?

Another big undertaking at FSL was a change to some working practices: Specifically, we changed our old way of managing projects, which I am informed was ‘Agile’, to a more specific form called ‘Scrum’.

The normal rule is that changing the way people do things always meets resistance, and the larger the change the greater the resistance. Fortunately, we’re a bit more enthusiastic than that at FSL. So, instead of grumbling and moaning, there was a lot of goodwill and excitement for trying a new way of doing things.

Scrum and Agile are the ‘done things’ in the software industry, but not so hot in my old industry of tax and accountancy. I admit I felt a little trepidation and wasn’t sure how it would affect my work; but it turned out to be rooted in basic principles like clear structure, time management, and defined objectives. So I needn’t have worried and I’m enjoying the new way of working.

 

Interesting questions we have been asked

Our clients have been running their tax packs for the 2022-23 tax year, which has meant a slew of questions coming in on all manner of areas, including whether an individual who inherited their deceased spouse’s shares, shortly after selling their own shares in the same company, needs to apply the anti-avoidance 30-day matching rule to the inheritance (answer: sorry, but yes).

There were a couple of queries which I thought were worth exploring here.

A common question from investors is what to do with ‘negative interest’. This is a charge to deposit money with the bank, rather than the bank paying the investor for providing them with a deposit. If credit interest paid into the account is subject to income tax, then surely, the reasoning goes, any negative interest taken out of it can be relieved?

Sadly, for the client, the answer is no. Income tax provided £233.4 billion or around 32% of HMRC’s total tax revenue for 2021-22 all by itself, which is by far the largest single proportion of any tax. As a result, the Government is now reliant on it to help finance its work – which means HMRC really doesn’t like giving relief away willy-nilly.  There are only a handful of very specific scenarios in which an individual may claim relief for interest paid (handily listed in the manuals here) and I’m afraid none covers ‘owning an investment account’.

Another common question concerns why US Treasury Bills are almost always treated as Deeply Discounted Securities even when the proceeds on maturity are listed in advance to be lower than the deep discount threshold. If a US T-Bill matures in 10 years, with a stated rate of 4% linked to inflation, it’s below the deep discount threshold for that bond of 5% (0.5% threshold per year x 10 years). So, why is it deeply discounted?

It’s because of the ‘linked to inflation’ bit. The rule is not that the bond will guarantee a deep discount on redemption, but merely that the bond has the potential to achieve it. The US T-Bill will redeem at 4%, BUT that amount will rise with inflation, and inflation could be high enough over 10 years to take the bill’s redemption proceeds over 5% (indeed, it probably will). Under the terms of the security, it is possible for the redemption proceeds to exceed the deep discount threshold, so it is treated as a Deeply Discounted Security.

The final common query I’ll talk about here, is about how CGiX works with the tax rules.  

A client has held units in an offshore reporting fund for many years, including when it was a non-reporting fund, and finally sells all their units. They expect to see a CGT gain on their CGT report or tax pack from CGiX. Yet instead they see that some of their units show as an income gain. Why? And is there any way to avoid that?

An offshore fund can sign up to, or leave, the reporting fund regime subject to certain requirements that I won’t go into here. This is usually referred to as a change of status. If a non-reporting fund joins the regime and becomes a reporting fund, from that point on, any units bought are treated as units in a reporting fund.

But units which were acquired before the change of status keep their old non-reporting status, including on sale. When they are sold, they are still non-reporting fund units, and the investor must pay income tax on the gain.

To plan for this, the investor may make an election to treat themselves as having sold their units on the last day of non-reporting status for the prevailing market price and having acquired their units again for that price on the first day of reporting status. They will have to pay income tax on the difference in value between the day of change of status and whatever cost they acquired the units for (even though they have not actually received any cash), but the two benefits are:

1. The book cost they may use for their units, when they do eventually dispose of them for real, is higher, reflecting any rise in value up to the change of status.
2. The gain on sale will be charged to capital gains tax, not income tax, so their tax bill is likely to be lower.

This is not a perfect plan by any means. Of course, the value of your investments may go up or down, and the investor may find that they have elected to make a deemed disposal only for their units to plummet in value later, so they in fact pay more in tax on a notional disposal than they would have had to pay on their real disposal. It is up to the taxpayer, the investor, to make that decision.

In CGiX, the automatic treatment of a change of status is a Transfer, shifting all units from non-reporting, to reporting, yet still maintaining that important acquisition history so that units are treated correctly. If you know that your client has made the deemed disposal election – again, it is only the taxpayer or their tax agent who can make that election via their tax return – then you can instead use the Exchange corporate action.

 

Please contact us if you have any enquiries. We are always happy to answer questions on CGiX, explain the tax rules or how they are processed in CGiX. The above is just a flavour of some that we have received this year.

Thanks for reading and have a lovely summer.