CAPITAL GAINS TAX

1
CAPITAL GAINS TAX
Theory and practice of taxation BModule
codeC33TB2Lecture 16

• SHARES AND SECURITIES

2
SHARES AND SECURITIES

• Shares/securities of the same type and in the
  same company might be acquired at different times
  and for different prices, but are otherwise
  identical.
• Where only some of the shares are sold it will be
  necessary to match them against purchases to
  ascertain the cost and arrive at the gain.
• Thus the problem of "matching" sales against
  purchases arises.

3
SHARES AND SECURITIES

• Example of matching
• ICI plc
• Purchases
  
• June 93 100 1 ordinary shares _at_ 230p 230
• May 94 100 1 ordinary shares _at_ 330p 330
• Sales
• June 06 50 1 ordinary shares _at_ 500p 250
• Which shares were sold?

4
SHARES AND SECURITIES

• The principle of pooling
• For purchases on certain dates the costs are
  pooled
• In the previous example this would have the
  following result
• Purchases
  
• June 93 100 1 ordinary shares _at_ 230p 230
• May 94 100 1 ordinary shares _at_ 330p 330
• Total 200
  560
• The cost of the 50 shares sold would be 50/200 x
  560 140. And the adjustment to the pool would
  be
• Less sales 50
  140
• Balance 150
  420
• Any additional purchases would be added to these
  balances

5
SHARES AND SECURITIES MATCHING RULES FOR
COMPANIES

• A disposal is matched against
• First - Acquisitions made on the same day
• Next - Acquisitions of previous 9 days on a FIFO
  basis
• These first two the matching is against
  individual purchases (not pooled)
• Next - Section 104 holding. This is the pool of
  holdings acquired on or after 1/4/82
• Next - 1982 holding. Pool of holdings acquired
  from 6/4/65 to 31/3/82)
• Finally - Acquisitions made pre- 6/4/65, on a
  LIFO basis (will not be covered)
• NB For individuals (not companies) indexation
  ended on 6/4/98 and the Section 104 holding is
  the pool of holdings acquired on or after 6/4/82
  and up to 5/4/98. There are different matching
  rules for individuals

6
SHARES AND SECURITIES MATCHING RULES FOR
COMPANIES

• Illustration Sale 13 Jun 2006Purchases
  Order of
  matching1 Jan 1960
  71 Jul 1964
  
  61982 holding (pool 6/4/65 - 31/3/82)
  5S 104 holding (1/4/82 - ten days before
  sale) 44 Jun 2006
  25 Jun 2006
  
  313 Jun 2006
  1

7
SHARES AND SECURITIES MATCHING RULES FOR
COMPANIES

• Example of matching (ignore indexation)
• Purchases
• Section 104 holding
  
• June 93 100 1 ordinary shares _at_ 230p 230
• May 94 100 1 ordinary shares _at_ 330p 330
• Total 200
  560
• 1 June 06 25 1 ordinary shares _at_ 480p 120
• Sales
• 1 June 06 50 1 ordinary shares _at_ 500p
  250
• Which shares were sold?

8
SHARES AND SECURITIES MATCHING RULES FOR
COMPANIES

• Sales
• 1 June 06 50 1 ordinary shares _at_ 500p
  250
• Cost
• Same day1 June 06 25 1 ordinary shares _at_
  480p 120
• Section 10425/200 x 560
  70
  
  190

9
SHARES AND SECURITIESSECTION 104 HOLDING

• Shares acquired by the company on or after 1
  April 1982.
• This will comprise
• 1 Shares acquired by a company between 1 April
  1982 and 1 April 1985.
• 2 Shares acquired by that company on or after 1
  April 1985.

10
SHARES AND SECURITIESSECTION 104 HOLDING

• 1 Shares acquired by a company between 1 April
  1982 and 1 April 1985.
• This will involve calculatinga)Number of shares
• b)Cost (ignoring indexation) of the shares
  c)Indexed cost of the shares. This consists
  of acquisition cost plus indexation allowance
  (based on dates of acquisition to 1 April 1985)

11
SHARES AND SECURITIESSECTION 104 HOLDING

• ABC Ltd bought these Ordinary shares in XYZ plc
• 2,000 in August 1984 (RPI 89.9) cost 5,500
• 2,000 in December 1984 (RPI 90.9) cost 6,500
• RPI at 1 April 1985 was 94.8
• The pool at 1 April 1985 is
• Narrative No of Shares Cost Indexed Cost
  
• August 1984 2,000 5,500
  5,500
• December 1984 2,000 6,500 6,500
• 4,000 12,000 12,000
• Indexation allowances
• 94.8-89.9
• 89.9 0.055x5,500 302
• 94.8-90.9
• 90.9 0.043x6,500 280
• Indexed cost of pool at 1 April 1985
  12,582

12
SHARES AND SECURITIESSECTION 104 HOLDING

• 2 Shares acquired by that company on or after 1
  April 1985.
• Subsequent acquisitions and disposals of shares
  which affect the indexed value of the pool at 1
  April 1985 are called Operative events
• Before incorporating these into the pool
  compute and incorporate a further indexation
  allowance (an indexed rise)
• From date of last operative event (or 1 April
  1985 if none previous) up to date of current
  operative event
• Indexation allowances within the FA 1985 pool
  post April 1985 are not rounded to 3 decimal
  places.

13
SHARES AND SECURITIESSECTION 104 HOLDING
EXAMPLE Acquisitions

• ABC Ltd bought a further 4,000 shares in XYZ Ltd
  on 15 July 1986 (RPI 97.5) for 8,000
• Narrative No of shares Cost Indexed cost
• Value at 1 April 1985 4,000 12,000
  12,582
• Indexed rise
• 97.5-94.8 x 12,582 358
• 94.8 12,940
• Acquired 4,000 8,000 8,000
• Pool value at
• 15 July 1986 8,000 20,000 20,940

14
SHARES AND SECURITIESSECTION 104 HOLDING
DISPOSALS

• After calculating the indexed rise to date of
  disposal
• DEDUCT from the Pool
• Relevant proportion of cost and indexed cost of
  shares sold computed by the part-disposal
  formula (A/AB) using the numbers of shares.
• NB indexation allowance is available to companies
  after April 1998

15
SHARES AND SECURITIESSECTION 104 HOLDING
DISPOSALS EXAMPLE

• ABC Ltd sold 6,000 shares on 15 July 2001 (RPI
  173.3) for 34,000 - Calculate the Chargeable
  gain.
• Narrative No of shares Cost Indexed cost
• Pool value at 15 July 1986 8,000 20,000 20,940
  
• Indexed rise
• 173.3-97.5 x 20,940
• 97.5 16,280
• 37,220
• Sold 6,000
• Cost and indexed cost
• 6,000 x 20,000 and 37,220 15,000 27,915
• 8,000
• Pool value at 15 July 2001 2,000 5,000
  9,305

16
SHARES AND SECURITIESSECTION 104 HOLDING
DISPOSALS EXAMPLE

• Chargeable gain is computed
• Proceeds 34,000
• Less cost 15,000
• Unindexed gain 19,000
• Indexation allowance (27,915-15,000) 12,915
• Chargeable gain 6,085
• REMEMBER indexation allowance cannot create or
  increase a loss.

17
SHARES AND SECURITIESREMEMBER indexation
allowance cannot create or increase a
loss.EXAMPLE

• Calculate the Chargeable gain or allowable loss
  if the sales proceeds were
• (a) 30,000 (b) 18,000 and (c) 4,000
• (a) (b) (c)
• Sales proceeds 30,000 18,000 4,000
• Less Cost 15,000 15,000 15,000
• Unindexed gain /(loss) 15,000 3,000
  (11,000)
• Less Indexation allowance
• (Maximum - 12,915) 12,915 3,000
  0
• Chargeable gain /(allowable loss) 2,085
  0 (11,000)

18
SHARES AND SECURITIESTHE 1982 HOLDING

• Shares of the same class in the same company
  acquired in the period
  
  5 April 1965 to 31 March 1982 (inclusive)
• Pooled into one holding
• Indexation is dealt with separately on each
  disposal from the pool
• Indexation allowance cannot create or increase a
  loss
• Costs are taken from the pool using the same
  method as for S 104 holding (A/AB) using the
  numbers of shares

19
SHARES AND SECURITIESTHE 1982 HOLDING - EXAMPLE

• Jon plc purchased 4,000 shares in Victor Ltd for
  7,500 on 15 March 1977 and a further 5,000
  shares for 4,000 on 25 June 1980. The market
  value of the shares on 31 March 1982 was 1.20.
• Jon plc sold 4,800 of the shares on 5 June 2001
  for 16,000.(RPI 174.4)
• SOLUTION No of Cost
• Shares
• 15 March 1977 4,000 7,500
• 25 June 1980 5,000 4,000
• Cost of 1982 holding 9,000 11,500

20
SHARES AND SECURITIESTHE 1982 HOLDING -
EXAMPLEComputation of chargeable gain

• Cost 31.3.82
• Value
• Proceeds 16,000 16,000
• Less pool cost
• 4,800 x 11,500 6,134
• 9,000
• 31.3.82 value 4,800 x 1.20 5,760
• --------- ---------
• Unindexed gain 9,866 10,240
• Indexation allowance
• 174.4-79.4 1.196 x 6,134 7,336 7,336
• 79.4
• Indexed (chargeable) gain 2, 530 2,904

21
SHARES AND SECURITIES THE MATCHING RULES FOR
INDIVIDUALS

• For individuals, trusts and personal
  representatives, the introduction of Taper Relief
  meant that pooling of shares ceased for
  acquisitions on or after 6 April 1998.
• This is necessary since taper relief is based on
  the length of time an asset is held.
• Now it is necessary to record the date of each
  post 6 April 1998 acquisition to enable
  individual taper relief calculations to be made
  on disposal.
• New "matching" rules will apply

22
SHARES AND SECURITIES THE MATCHING RULES FOR
INDIVIDUALS

• Disposal after 5 April 1998 will be identified
  with acquisitions thus
• 1. Acquisitions made on the same day
• 2. Acquisitions within the following 30 days
  (known as the "bed and breakfast" rule)
• 3. Previous acquisitions after 5 April 1998
  identifying the most recent acquisitions first
  (LIFO basis)
• 4. Section 104 holding (acquired between 6/4/82
  and 5/4/98)
• 5. 1982 holdings (acquired from 6/4/65 to
  5/4/82)
• 6. Acquisitions made pre- 6/4/65, on a LIFO basis
  (will NOT be examined)
• 7. Subsequent additions outwith the 30 day period
  (2 above)

23
SHARES AND SECURITIES MATCHING RULES FOR
INDIVIDUALS

• Illustration Sale 4 Jun 2006Purchases
  Order of
  matching1 Jan 1960
  91 Jul 1964
  
  81982 holding (pool 6/4/65 - 5/4/82)
  7S 104 holding (6/4/82 - 5/4/98)
  61 Jan 1999
  53 Jul
  1999
  44 Jun 2006
  15 Jun 2006
  
  213 Jun 2006
  3

24
SHARES AND SECURITIES THE MATCHING RULES FOR
INDIVIDUALS

• The "bed and breakfast" rule is an anti-avoidance
  provision.
• It had been a popular "Tax Planning" device to
  sell shares to crystallise a capital gain/loss on
  them and then buy the same shares a day or two
  later. The taxpayer actually wanted to keep the
  shares but effectively realise a CGT gain/loss -
  possibly to make use of Annual Exemption. The
  repurchase price became cost for future
  disposals.
• The new rule matches such sales to the repurchase
  of shares (bought for much the same price as the
  shares sold) thus no material gain or loss will
  arise.
• For the sect 104 holding held by individuals at 5
  April 1998 the indexation allowance will be
  calculated to April 1998 and the pool closed.

25
SHARES AND SECURITIESEXAMPLE POST APRIL 1998
DISPOSALS FOR INDIVIDUALS

• Brian acquired these shares in Carriages plc as
  an investment
• Acquisition No of Cost 31.3.82
• Date shares MV
• 9.10.80 4,000 6,000 7,000
• 10.11.90 10,000 25,000 n/a
• 5.8.04 3,000 11,400 n/a
• 18.7.06 5,000 19,000 n/a
• 20,000 shares were sold on 12 July 2006 for
  80,000. Calculate the chargeable gain.

26
SHARES AND SECURITIESEXAMPLE POST APRIL 1998
DISPOSALS FOR INDIVIDUALS SOLUTION

• 1. MATCH THE SHARES
• a)ACQUIRED WITHIN 30 DAYS OF DISPOSAL
  
• Proceeds 5,000 x 80,000 20,000
• 20,000
• Less cost 19,000
• Gain 1,000 b)POST 5 APRIL 1998
  ACQUISITIONS
• Proceeds 3,000 x 80,000 12,000
• 20,000
• Less cost 11,400 Gain 600
• NB no taper relief since owned for less than 2
  years.

27
SHARES AND SECURITIESPOST APRIL 1998 DISPOSALS
FOR INDIVIDUALSc)SECTION 104 HOLDING

• No of shares Cost Indexed cost
• Acquired November 1990 10,000 25,000 25,000
• Indexation to April 1998
• 162.6 130.0
• 130.0 x 25,000 6,269
• Pool at 5.4.98 10,000 25,000 31,269
• July 2005 sale 10,000 25,000
  31,269 Computation of chargeable gain
  Proceeds 10,000 x 80,000 40,000
• 20,000
• Less cost 25,000
• Unindexed gain 15,000
• Indexation
  (31,269-25,000) 6,269
• Indexed gain - subject to taper relief
  8,731
• Taper relief 8 1 9 years 65 chargeable
  5,675

28
SHARES AND SECURITIES POST APRIL 1998 DISPOSALS
FOR INDIVIDUALS (d) 1982 HOLDING

• No of shares
  Cost 31.03.82
• 
  Value
• Acquisition Oct 1980 4,000 6,0
  00 7,000
• Disposal July 2006 2,000 3,0
  00 3,500
• Carried forward 2,000 3,00
  0 3,500
• Computation of chargeable gain
  Cost Mkt Val
• 
  31.3.82
• Proceeds 2,000 x 80,000
  8,000 8,000
• 20,000
  
  Less cost/MV
  31.3.82 3,000
  3,500
• Unindexed gain 5,0
  00 4,500

29
SHARES AND SECURITIES POST APRIL 1998 DISPOSALS
FOR INDIVIDUALS (d) 1982 HOLDING

• Unindexed gain 5,0
  00 4,500
• Less indexation to April 1998
• 162.6 79.4 1.048 x 3,500
  3,668 3,668
• 162.6
• Indexed gain- subject to taper relief
  1,332 832
• Lower gain is chargeable 832
• Taper relief 8 1 9 years 65
  chargeable 540
• Total gain is (1,0006005,675540)
  7,815

30
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL

• 1. BONUS ISSUES
• New shares issued free to existing shareholders.
• No cash comes into the company.
• No material impact on the value of the company or
  total value of shares held.
• ACTION REQUIRED
• Increase the number of shares in each relevant
  holding.

31
SHARES AND SECURITIESBONUS ISSUES - EXAMPLE

• These transaction by Paul in the ordinary shares
  of Exe Ltd will be matched as follows
• 
  Cost mv 3/82
• 6.4.66 Bought 600 shares 200
  450
• 6.4.70 Bought 1200 shares 600
  900
  Indexd
  
  cst to 4/98
• 6.4.83 Bought 1000 shares 1,200
  1,500
• 6.10.99 Bonus issue 1 for 4
• 6.5.06 Sold 2,250 shares

32
SHARES AND SECURITIESBONUS ISSUES - EXAMPLE

• (a) The Sect 104 holding No of
  Cost Indxd cst
• Shares
• 6.4.83 1000 1,200
  1,500
• 6.10.99 Bonus issue 1 for 4 250
  - -
• 1250 1,200 1,500
  
• 6.5.06 disposal (1250)
  (1,200) (1,500) Sect 104 balance
  nil nil
  nil
• (b) The 1982 holding
  MV 3/82
• 6.4.66 600 200
  450
• 6.4.70 1200 600
  900
• 1800 800
  1,350
• 6.10.99 Bonus issue 1 for 4 450
  - -
• 2250 800
  1,350
• 6.5.06 disposal 1000/2250 1000
  355 600
• Balance remaining 1250 445
  750

33
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE

• Additional shares offered for sale to existing
  shareholders (usually at a price below market
  value)
• THUS THERE IS AN ADJUSTMENT TO ORIGINAL COST.
• To calculate the indexation allowance,
  expenditure on a rights issue is taken as being
  incurred on the day of issue NOT the date of
  acquisition of the original holding.
• Rights shares derived from shares in the 1982
  holding go into that holding.
• For individuals those derived from post 5 April
  1998 holdings attach to those holdings.

34
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE

• Illustration
• Purchase 1 Jan 1999 400 shares _at_ 8
  3,200
• Rights issue 1 Jul 2000 1 for 4 _at_ 5
  100 shares _at_ 5
  500
• Holding becomes
• 1Jan 1999 400 _at_ 8
  3,200Rights 100
  500
  500 3,700

35
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE - EXAMPLE

• Jean had these transactions in the ordinary
  shares of SSR Ltd. (A trading company)
• July 1995 Bought 3,000 shares for
  4,000 (a 10
• holding)
• September 1999 Bought 2,000 shares for 6,000
• February 2000 Took up 1 for 4 rights issue at
  4.20
• per share.
• October 2006 Sold 6,000 shares for 48,000
• Compute the chargeable gain/allowable loss
  arising from the sale in October 2006

36
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE SOLUTION

• a)The post 5 April 1998 Holding Number Cost
• Acquired September 1999 2,000 6,000
• February 2000
• rights issue 1 for 4 500 2,100
• 2,500 8,100 Computation of Chargeable
  Gain
• Proceeds 2,500 x 48,000 20,000
  6,000
• Less cost 8,100
• Gain before taper relief 11,900
• Taper relief (based on ownership of original
  holding)
• 25 (6 years - business asset) x 11,900
  -
• Chargeable gain 2,975

37
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE SOLUTION (b) The S. 104
holding

• No of shares Cost Indexed
• Cost July 1995
  3,000 4,000 4,000
• Indexation to April 1998
• 162.6-149.8x 4000
• 149.8 342
• Balance of "frozen" pool at April 1998
  3,000 4,000 4,342
• February 2000 - 1 for 4 rights issue
  750 3,150 3,150
• 3,750 7,150 7,492
• Disposals - October 2005 3500/3750
  3,500 6,673 6,993 Carried
  forward 250 477
  499

38
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE SOLUTION

• Computation of the Gain
• S 104 holding
• Proceeds 48,000 x 3,500 28,000
  6,000
• Cost 6,673
• Unindexed gain 21,327
• Less indexation allowance (6,993-6,673)
  320
• Chargeable gain 21,007
• Taper relief (based on ownership of original
  holding)
• 25 (More than two years business asset) x
  21,007 5,252
• The total chargeable gain is 2,9755,252
  8,227

39
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL 2. RIGHTS ISSUES 6

• IF SHAREHOLDER DOES NOT SUBSCRIBE FOR NEW SHARES
  BUT SELLS HIS RIGHTS nil paid
• Provided that the proceeds from the sale of the
  rights is not more than the higher of 3000 OR 5
  of the market value of the shares prior to the
  issue, the transaction is treated as a "Small
  Capital Distribution" the proceeds from the sale
  of the rights are deducted from the cost of the
  shares. Otherwise it will be treated as a
  part-disposal
• Check that the sale of rights can be defined as a
  small distribution.

40
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL RIGHTS ISSUE

• Illustration
• Purchase 1 Jan 1999 400 shares _at_ 8
  3,200
• Rights issue 1 Jul 2000 1 for 4 _at_ 5 MV at
  1/7/00 5.50 per share
• Sell rights for 40p per share 40
• Share holding
• 1 Jan 1999 400 shares _at_ 8
  3,200
• Less sale of rights
  40
  
  3,160

41
SHARES AND SECURITIES ALTERATIONS OF SHARE
CAPITAL -TAKEOVERS

• A takeover occurs where one company acquires the
  shares of another
• Liability to CGT
• If the takeover is entirely for shares (a "paper
  for paper" takeover) no chargeable disposal
  arises and the shares in the acquiring company
  replace those held in the company being taken
  over
• If the consideration is for cash a gain or loss
  must be computed as with any normal sale
• If the takeover is partly cash and partly shares
  it as treated as a part disposal the normal part
  disposal rules apply.
• Provided that the cash received is not more than
  the higher of 3000 OR 5 of the total value of
  the takeover, the transaction is treated as a
  "Small Capital Distribution".