Last month, the boards of Abrdn China Investment Company (ACIC) and Fidelity China Special Situations (FCSS) announced plans to roll the former into the Fidelity trust – one of a number of investment trust mergers announced this year. If shareholders approve the proposals, as well as investment implications, there could also be tax implications for Abrdn China shareholders, depending on what they choose to do.
If the merger goes ahead, it will involve putting Abrdn China into voluntary liquidation, and transferring its assets to Fidelity China Special Situations in exchange for new shares in the Fidelity trust. But Abrdn China shareholders will also have the option of realising up to 33 per cent of their shares in this trust at a 2 per cent discount to formula asset value per share. If not all shareholders do this – as is likely – those that do will be able to receive cash in respect of an even larger portion of their shares.
If you hold the trust outside a tax-efficient wrapper and opt to receive shares in Fidelity China Special Situations, this should not result in a capital gains tax (CGT) charge.
“A merger of investment trusts is generally treated as a no gain, no loss transaction by HM Revenue & Customs (HMRC), meaning the gain or loss carries over to the new holding,” explains Shaun Moore, tax and financial planning expert at Quilter. “This is because HMRC treats the companies as if they were the same company and the new shares as though they were issued in exchange for the original shares. Therefore, in most cases, an investment trust merger is unlikely to cause CGT to be payable.”
However, if you opt for a partial cash exit, this would be a disposal for CGT purposes because an element is paid out.
But whether you actually end up paying any CGT depends on a number of things. Clearly, you would need to have made a gain on the original purchase of the shares in the trust. Calculating this involves more than simply establishing if you will receive more than you paid for the holding. For example, you can deduct costs associated with the purchase and sale from a gain (See How to calculate your CGT, IC 20 May 2022).
If you've made a gain in the current tax year this can be worth up to £6,000 before any tax is due. The Abrdn China/Fidelity merger is expected to complete by the end of March next year, so should – perhaps narrowly – fall within this time period, rather than the 2024-25 tax year when the annual CGT allowance will fall to £3,000.
You can also offset losses from current and previous tax years against a gain, again reducing a CGT liability.
If you are minded to take cash, you could also transfer some of your holding to a spouse or civil partner, as this doesn’t incur a tax charge, and both use your annual CGT allowances and any losses.
If you and your spouse have used up your CGT allowances for this year and taking cash could result in a tax bill, it could be better to take new shares in Fidelity China Special Situations. And if it isn’t suitable for your investment purposes, you could then gradually reduce the holding each tax year by making use of your available allowances.
