Enter Your E-mail

UK Taxation for Students: A Simplified Approach by Malcolm Finney

Malcolm Finney, author of ‘UK Taxation for Students: A Simplified Approach’, looks at the capital gains tax position on the sale of shares and securities for individuals, and outlines an 8 step process for working out gains and losses.

Securities

Government stocks and most commercial securities i.e. company debentures, loan stocks etc. are exempt from capital gains tax when they are held by individuals.

For companies, capital gains and losses on government and commercial securities would normally be treated as part of a non trading loan relationship gain or loss.

Shares

There is no equivalent exemption from CGT in respect of share sales by individuals. Sales of shares thus give rise to either capital gains and/or capital losses.

The main problem in working out the capital gain/loss which may arise on a share sale is identifying which shares of those acquired at various different times have in fact been sold.

Example

John Smith has purchased the following ordinary shares in ABC Ltd:

100 shares on 1st March 1996 for £4,000
50 shares on 3rd August 1998 for £1,400
350 shares on 6th October 2002 for £6,250

On 18th September 2005 John sold 380 shares.

The issue thus arises as to which of the shares which John had bought he has now sold.

Matching rules: for individuals

The tax legislation lays down the following so called matching rules i.e. on any sale of shares of the same class in the same company the shares sold are to be matched as follows:

• with shares acquired on the same day, then

• with shares acquired within 30 days after the disposal on a FIFO basis, then

• with shares acquired after 5th April 1998 on a LIFO basis, then

• with shares in the 1985 pool

Same day - Any shares which have been acquired on the same day as any sales are assumed to have been sold first.

Following 30 days - This may seem strange. There are reasons for it but it is not necessary to understand them or be aware of them. Thus any shares which have been acquired within 30 days after the date of any sales are assumed to have been sold next.

Acquisitions after 5 April 1998 - This date is used because at this date indexation allowances cease and taper relief begins (see Chapter 12). As taper relief applies after 5th April 1998, any purchases after this date are matched separately with any share sales.

1985 Pool - Contains shares acquired on or after 6 April 1982 but before 6 April 1998.

Any pool can only contain shares of the same class in the same company (e.g. ordinary shares in ABC Ltd; or ordinary shares in XYZ Ltd). Before any matching the value of the pool as at 5th April 1998 must be determined (i.e. the cost of any purchases prior to this date need to be indexed to this date).

The indexed value of the 1985 Pool as at 6th April 1998 will normally be given in any questions although occasionally it will be necessary to derive the pool value as at 5th April 1998 from the information given in the question.

Computational procedure

To work out the capital gain/loss on a share sale a number of separate calculations may be necessary.

Each of the calculations below is carried out after taking into account indexation allowances but before taper relief.

The basic approach is to work back in time matching shares sold with those purchased. Thus, those shares which are in effect deemed to have been sold first are those which were purchased later in time.

STEP 1

Match shares sold with shares acquired on same day.
Calculate capital gain/loss on this matching.

If number of shares sold exceed shares acquired on same day then continue
to STEP 2 (if this is not the case no further computation is necessary).

STEP 2

Match shares sold not already matched under STEP 1 with shares acquired in next 30 days.

Calculate capital gain/loss on this matching.

If number of shares sold exceed shares matched under STEPS 1 and 2 then continue to STEP 3.

STEP 3

Match shares sold not already matched under STEPS 1 and 2 with shares acquired on or after 5th April 1998.

Calculate capital gain/loss on this matching.

If the number of shares sold exceed shares matched under STEPS 1, 2 and 3 then continue to STEP 4.

STEP 4

Match shares not already matched under STEPS 1, 2 and 3 with shares held in 1985 pool.

Calculate capital gain/loss on this matching.

STEP 5

Having matched all the shares sold under STEPS 1 to 4 a capital gain and/or capital loss will have arisen under each of STEPS 1 to 4. If there are no capital losses simply proceed to STEP 6. If there are any capital losses these must be first offset against the capital gains in the most optimal manner (i.e. use the rule laid down in Chapter 9).

STEP 6

Reduce the capital gains (after capital loss offset as under STEP 5 where necessary) by any taper relief.

STEP 7

Aggregate the net gains from STEP 6 to produce one single capital gain.

STEP 8

Deduct the annual exemption from the figure in STEP 7 to finally give the net chargeable gain arising on the share sale.

September 2005

Malcolm Finney B.Sc M.Sc (Bus Admin) M.Sc (Org Psy) MCMI C Maths MIMA

About the author

Malcolm Finney is an international tax consultant and founder of Management Dynamics which specialises in both tax and management training and consultancy. Malcolm has also lectured on taxation at many of the London‐based accountancy colleges.

Formerly, Malcolm was Head of Domestic and International Tax at the London based law firm Nabarro Nathanson; Head of International tax at international accountancy firm Grant Thornton; and prior to Grant Thornton worked for J F Chown & Co Ltd, J Henry Schroder Wagg & Co Ltd and Duncan C Fraser & Co.

Malcolm is joint editor of the leading text International Corporate and PersonalTaxation published by Tolley/Butterworth and has recently published Inheritance Tax for Students: A Simplified Approach a book also intended for accountancy students (Spiramus Press, 2005). Malcolm has written extensively for numerous tax journals both domestic and international and has also spoken at both domestic and overseas conferences on a variety of taxation topics.

The above article is adapted from ‘UK Taxation for Students: A Simplified Approach’ published by Spiramus Press Ltd. To order UK Taxation for Students: A Simplified Approach click here