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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Share identification rules for corporation tax: section 104 holding: disposals from the holding

Disposals

Where a company disposes of all the shares in the Section 104 holding the indexation allowance due is simply the difference between the pool of qualifying expenditure and the indexed pool of expenditure, TCGA92/S110 (3).

Where a company only disposes of some of the shares in the Section 104 holding it is necessary to apportion the allowable cost and the indexation allowance due. Both the pool of qualifying expenditure and the indexed pool of expenditure are apportioned using the same formula. The indexation allowance due on a part disposal is the amount by which the apportioned pool of indexed expenditure exceeds the apportioned pool of qualifying expenditure, TCGA92/S110 (2).

Because the Section 104 holding is treated as a single asset the part disposal rules of TCGA92/S42 apply on a disposal of less than all the shares in the holding. In strictness you should apportion both the cost of the shares and the indexed cost using the A/A+B formula where A equals disposal proceeds of sale and B the market value of the remaining asset. But in practice the apportionment may be made by reference to the number of shares sold. But see CG51919+, if a share reorganisation involves different classes of share.

EXAMPLE

  • May 2012 a company bought 2,000 shares in B Ltd at £4.50 per share.
  • January 2014 the company took up a rights issue of two new B Ltd shares for each share held at a price of £5 per share.
  • March 2016 the company solds 600 shares at £6 per share.
  • The company incurred costs of £30 in relation to the disposal.

SECTION 104 HOLDING

  Number of shares Pool of qualifying expenditure Indexed pool of expenditure
       
Step 1      
A Section 104 holding is created in May 2012 2,000  £  9,000  £  9,000
Step 2      
The rights issue in January 2014 is an operative event      
Indexation      
£9,000 x 0.042 (HMRC published factor)      £     378
  2,000  £  9,000  £  9,378
Step 3      
Add the cost of the rights issue shares to the two pools 4,000  £20,000  £20,000
  6,000  £29,000  £29,378
Step 4      
The part disposal in March 2016 is an operative event      
Indexation      
£29,378 x 0.034 (HMRC published factor)      £     999
  6,000  £29,000  £30,377
Step 5      
Reduce the two pools by the apportioned amounts of cost and indexation (from the Practical Method) (600) (£  2,900) (£  3,038)
       
Section 104 holding following disposal in March 2016 5,400  £26,100  £27,339

 

CAPITAL GAIN - STRICT METHOD

 

You apportion the pool of indexed expenditure and the pool of qualifying expenditure using the formula:-

 

                           Disposal proceeds                           
 
Disposal proceeds + Market value of remaining shares

 

The market value of the B Ltd shares on date of sale is £6.20 per share. If the shares are quoted the market value, TCGA92/S272 (3), will not necessarily be the same as the price received by the company, see CG59510.

Pool of indexed expenditure £30,377 x {£3,600/(£3,600+£33,480)} =  £2,950
     
Pool of qualifying expenditure £29,000 x {£3,600/(£3,600+£33,480)} =  £2,816
Indexation allowance Pool of indexed expenditure - Pool of qualifying expenditure  £  134
     
Disposal proceeds (Consideration)    £3,600
     
Less Cost    
Cost of disposal £2,816
£     30  
(£2,846)      
    Unindexed gain  £  754
    Less Indexation (£   134)
    Chargeable gain  £  620

 

CAPITAL GAIN - PRACTICAL METHOD

You apportion the pool of indexed expenditure and the pool of qualifying expenditure using the formula:-

 

 

      Number of shares sold      
 
Total number of shares in pool

 

Pool of indexed expenditure £30,377 x (600/6,000) =  £3,038
     
Pool of qualifying expenditure £29,000 x (600/6,000) =  £2,900
Indexation allowance Pool of indexed expenditure - Pool of qualifying expenditure  £  138
     
Disposal proceeds (Consideration)    £3,600
     
Less Cost    
Cost of disposal £2,900
£     30  
(£2,930)      
    Unindexed gain  £  670
    Less Indexation (£  138)
    Chargeable gain  £  532
       

 

The capital gain has been computed by both the strict method using the A/A+B formula and the practical method using the number of shares sold. At Step 5 the adjustment has been made using the practical method. All future computations will use the practical method.