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HMRC internal manual

Capital Gains Manual

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Groups: indexation allowance restriction: just/reasonable: ordinary shares

The following example illustrates an appropriate method for restricting indexation allowance on a disposal of shares other than redeemable preference shares under TCGA92/S183 (2). The starting point is a disposal on or after 15 March 1988.

STEP 1

Apply the general identification rules. These include the bed and breakfasting rule in TCGA92/S106 and the ten day rule in TCGA92/S107 (3). If on applying these rules no indexation allowance is due on the disposal there is no need to proceed further. The following steps are only necessary in relation to pooled shares.

STEP 2

Apply the tests in TCGA92/S183 (3) to every acquisition since linkage so that all the acquisitions are divided into `caught’ acquisitions and `other’ acquisitions.

STEP 3

Allocate any disposals before 15 March 1988 so far as possible to the various `caught’ acquisitions, and to each of those acquisitions on a proportionate basis.

STEP 4

Apportion the shares disposed of to the `caught’ and `other’ holdings on a pro rata basis.

STEP 5

Compute what the indexation allowance would have been if each tranche of each `caught’ acquisition now deemed to be disposed of had been a separate acquisition which had never been included in a pool. The total of these notional indexation allowances gives the appropriate indexation restriction.

STEP 6

Deduct the aggregate of the indexation allowances computed in Step 5 from the indexation allowance otherwise due on the disposal, but not so as to affect the calculation of the indexed pool of expenditure.

EXAMPLE

18 May 1982 acquisition 15,000 shares at £2 each
     
6 Dec 1982 rights issue 2 for 3 at £1 each
28 Aug 1985 disposal 5,000 shares for £3 each
29 March 1986 acquisition 4,000 shares at £3.50 each
2 April 1986 disposal 2,000 shares for £4 each
12 Aug 1986 disposal 1,000 shares for £4.50 each
1 Jan 1989 disposal 500 shares for £5 each.

The companies became linked on 31 December 1985. The acquisition of shares on 29 March 1986 is caught by TCGA92/S183 (3).

This example assumes an inflation rate of 5 per cent per annum for indexation purposes from August 1986.

COMPUTATION OF INDEXATION ALLOWANCE BEFORE RESTRICTION

  shares held relevant expenditure indexed pool
       
event   £ £
May 1982 acquired 15,000 30,000 30,000
6 Dec 1982 £30,000 x RE - RL     327
RL      
right issue 10,000 10,000 10,000
  25,000 40,000 40,327
28 Aug 1985 indexation     6,343
      46,670
disposal 5,000 8,000 9,334
  20,000 32,000 37,336
29 March 1986 indexation     486
      37,822
acquired 2,000 7,000 7,000
  22,000 39,000 40,822
12 August 1986 indexation     505
      45,327
disposal 1,000 1,773 2,060
  21,000 37,227 43,217
1 Jan 1989 indexation     5,047
      48,314
disposal 500 886 1,150
  20,500 36,341 47,164
  • 4,000 acquired but 2,000 sold within ten days. The ten day rule in TCGA92/S107(3) applies.

RESTRICTION OF INDEXATION ALLOWANCE

STEP 1

Apply ordinary identification rules.

STEPS 2 AND 3

distinguish acquisitions between `caught’ and `other’ shares. Assume any disposals before 15 March 1988 were of `caught’ shares.

  ‘caught’ ‘other’
     
May 1982   15,000
     
December 1982   10,000
     
August 1985   (5,000
    sold)
March 1986 2,000  
  (net)  
  2,000 20,000
     
August 1986 1,000 -
  1,000 20,000

STEP 4

‘caught’ shares 500 x 1,000 = 24
           
      21,000    
‘other’ shares 500 X 20,000 = 476
      21,000    

STEP 5

Compute indexation on 24 shares acquired in March 1986 for £3.50 each and disposed of in January 1989, say £12.

STEP 6

Deduct £12 from indexation otherwise available.

£1,150 - £886 = £264 - £12 = £252

CHARGEABLE GAIN SUMMARY

      £
       
  proceeds   2,500
less cost   886
    unindexed gain 1,614
less indexation   252
    chargeable gain 1,362