This helpsheet explains the basic rules which apply in simple cases to the acquisition and disposal of shares by individuals, personal representatives and trustees in the tax year. It helps you work out the capital gain or loss if you’ve disposed of shares in that tax year. If you’re in any doubt about your circumstances, ask your tax adviser. We’ll also be pleased to help. You can also consult our Capital Gains Manual, which explains the rules in more detail.
This helpsheet explains:
- why special rules are needed
- how you identify the shares disposed of
- how you work out the gain under the ‘bed and breakfasting’ rule
- how you work out the gain if the shares are held in a Section 104 holding
- the treatment of units in a unit trust
It will help you fill in the Capital Gains summary pages of your tax return. This helpsheet refers to acquisitions and disposals. These aren’t restricted to purchases and sales although they will be the most common events. An important exception is where share reorganisations such as rights and bonus issues, or an issue of shares on a company takeover, aren’t treated as acquisitions. See Helpsheet 285 Share reorganisations, company takeovers and Capital Gains Tax.
This helpsheet also assumes that the capital gain or loss will be calculated using the actual costs of acquisition and the actual disposal proceeds. The section ‘Transferring assets between connected people’ on page CGN 2 of the Capital Gains summary notes explains the circumstances in which you must substitute market value for actual cost or disposal proceeds.
Helpsheet 287 Employee share and security schemes and Capital Gains Tax explains more about shares which you acquire in connection with your employment or by exercising an employee share option.
Helpsheet 295 Relief for gifts and similar transactions explains more about the capital gains treatment of gifts, including gifts to charity. Helpsheet 342 Charitable giving tells you about the Income Tax relief available for gifts of certain shares, securities and other investments to charity.
The general rules described in this helpsheet may not apply to any shares which you acquired under the Enterprise Investment Scheme (EIS), or to shares in a Venture Capital Trust (VCT). For general information on EIS and VCT shares see Helpsheet 297 Enterprise Investment Scheme and Capital Gains Tax and Helpsheet 298 Venture capital trusts and Capital Gains Tax.
Ask us or your tax adviser if you need detailed information on the rules for EIS or VCT shares.
Nor do these general rules apply to shares issued on the exercise of an option under the Enterprise Management Initiative on or after 6 April 2012, the rules applying to those shares are explained in Helpsheet 275 Entrepreneurs’ Relief.
Why are special rules needed
Shares of the same class in the same company are identical. Suppose you’ve a holding of 12,000 Wilson and Strickland plc 25p ordinary shares acquired at different times for different prices. You then sell 2,000 shares. To calculate the gain you need to know how much cost can be attributed to the shares you’ve sold. The capital gains rules for shares allow you to do this.
From 6 April 2008 all shares of the same class, in the same company, are together called a ‘Section 104 holding’. You add together the costs of the shares in this holding: each share in the holding is treated as if acquired at the same average cost.
There are a couple of circumstances in which shares won’t be regarded as becoming part of the holding. Mainly shares affected by the ‘bed and breakfasting’ and ‘same day’ rules (see below).
Suppose you bought 12,000 Wilson & Strickland plc 25p ordinary shares as follows:
|7 June 1979||2,000 shares|
|4 November 1982||2,500 shares|
|26 August 1987||2,500 shares|
|7 July 1998||3,000 shares|
|14 May 2006||2,000 shares|
You would have a Section 104 holding of 12,000 shares – containing all of your purchases
How to identify the shares disposed of
When you dispose of shares you can’t work out your capital gain or loss until you’ve matched the shares disposed of with shares you acquired. You’re treated as disposing of shares in the following order:
|First||Shares acquired on the same day as the disposal (the ‘same day’ rule).|
|Second||Shares acquired in the 30 days following the day of disposal (the ‘bed and breakfasting’ rule) provided the person making the disposal was resident in the United Kingdom at the time of the acquisition.|
|Third||Shares in the Section 104 holding.|
If the above rules fail to exhaust the shares disposed of, the remaining shares are matched with later acquisitions, taking the earliest one first.
Mr Schneider owned 10,000 shares in Mesopotamia plc.
500 were purchased on 11 September 2016. The remaining 9,500 are held in the Section 104 holding. Mr Schneider sells 4,000 shares on 30 August 2016. The disposals are identified as:
- 500 against the shares purchased on 11 September 2016 under the ‘bed and breakfasting’ rule
- 3,500 against the shares in the Section 104 holding
How you work out the gain under the ‘bed and breakfasting’ rule
If a disposal of shares is identified with shares acquired within the following 30 days, the gain or loss on disposal is the difference between the net disposal proceeds and the acquisition cost.
This ‘bed and breakfasting’ rule doesn’t apply if the person who made the disposal wasn’t resident in the United Kingdom for tax purposes at the time of the acquisition.
Example 2 continued
Suppose Mr Schneider received £6,000 for the 4,000 shares he sold and paid £850 for the 500 he had bought a few days later. Because he bought additional shares within 30 days of making the disposal, 500 of the shares sold aren’t matched with shares in the holding. They are identified with the 500 shares bought on 11 September 2016.
The gain or loss on those shares is calculated as follows:
|Disposal proceeds (apportioned 500/4,000 x £6,000)||£750|
How to work out the gain for shares in a Section 104 holding
The Section 104 holding consists of a single pool of expenditure usually representing the actual cost of shares.
The exception to using the actual cost is if you held some of the shares on 31 March 1982. In that case you’ll need to use the market value of the shares on that day. If the shares were quoted on a recognised Stock Exchange on 31 March 1982 you can find the value from authoritative published sources such as the Interactive Data Capital Tax Service. If not, then you or your professional adviser will have to provide a valuation.
We’ll want to check that valuation. Many quoted companies have undergone share reorganisations since 1982 and you’ll probably need to refer to Helpsheet 285 Share reorganisations, company takeovers and Capital Gains Tax.
The pool of allowable cost is adjusted each time an ‘operative event’ occurs. An operative event is anything which reduces or increases the value of the pool of cost. Purchases and sales of shares are the most common examples of operative events.
The basic steps for working out a gain (or loss) on a disposal of shares in a Section 104 holding are as follows.
If all the shares in the holding are disposed of, the allowable expenditure is all of the pool of cost. If only some of the shares are disposed of, the allowable expenditure is a fraction of the pool of actual cost. The fraction is ‘Number of shares sold’ divided by ‘Total number of shares in the holding’.
The remaining cost in the holding, to be identified against future disposals, is reduced accordingly. See Example 3.
For disposals before 6 April 2008, in addition to a Section 104 holding, you may have had a separate pool of shares held at March 1982 (the 1982 holding), shares held in 1965 and shares acquired from 1998 (which were not pooled). For disposals from 6 April 2008 you’ll simply need to add together all the shares held and their allowable costs to make up the Section 104 holding.
You’ll need to convert these holdings into a single Section 104 holding now if this is the first time you’ve made a disposal of such shares since the 2008 changes. There are some particular points to note:
- the cost you carry over from any existing Section 104 holding is the actual allowable cost. It was previously necessary to also keep a record of the indexed cost. You should not use that figure because Indexation Allowance doesn’t apply to disposals on or after 6 April 2008
- you must use the market value at 31 March 1982 for shares held on that date
- only include the allowable cost of those shares you still held at 6 April 2008
Units in a unit trust
Units in a trust are treated as if they are shares in an ordinary company. The basic rules described in this helpsheet apply equally to such units (and also to shares in an investment trust or an open-ended investment company). But there are some extra points to note.
If you hold accumulation units you won’t receive distributions of income from the trust. Instead, the income is retained and reinvested automatically for you (a ‘notional distribution’). You don’t receive any new units, but the value of your existing units is increased. If you receive notional distributions which are subject to Income Tax, you are allowed the amount of these distributions as additional expenditure on your accumulation units.
A unit trust may take the form of an ‘umbrella scheme’ authorised by the Financial Services Authority. These schemes have separate sub-funds which are treated as separate authorised unit trusts for Capital Gains Tax purposes. A switch from units in one sub-fund to units in another will normally be a disposal of the old units, on which capital gain or loss will arise. But if the switch occurs as part of a merger of sub-funds, the rules described in Helpsheet 285 Share reorganisations, company takeovers and Capital Gains Tax may apply. If so, you aren’t treated as disposing of your old units at the time of the merger.
Monthly saving schemes
Many authorised unit trusts, and also authorised investment trusts and open-ended investment companies, offer investors monthly saving schemes. We have a Statement of Practice, SP2/99, covering the Capital Gains Tax treatment of units and shares in monthly schemes. We can give you a copy of SP2/99 and the Press Release ‘Monthly Savings in Investment Funds’, dated 31 March 1999, which accompanied it.
Claims for Investors’ relief can’t be made until April 2019 at the earliest however personal record keeping of share holdings from 17 March 2016 will be required for any future claims. See Investors’ Relief guidance in the Capital Gains Tax Manual for further information.
Online forms, phone numbers and addresses for advice on Self Assessment.