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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Share reorganisations: apportionment of cost: 1982 holding

If the original shares were held in a 1982 holding any additional expenditure on a rights issue should be included in the total base cost but indexation allowance will only be given from the date of payment.

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.

EXAMPLE

  • November 1978 a taxpayer buys 1,000 25p ordinary shares in AB Electronic Products Group PLC at a total cost of £800.
  • November 1982 1 for 4 rights issue at 345p per share payable in November. Total shares acquired 250, cost £862.
  • December 1983 2 for 1 bonus issue. Shares acquired 2,500.
  • March 1984 1 for 3 rights issue at 400p per share payable in April. Shares acquired 1250, cost £5,000.
  • September 1987 1 for 5 rights issue at 350p per share payable in October. Shares acquired 1,000, cost £3,500.
  • September 1988 the taxpayer sells 3,000 shares for £12,000.

The taxpayer has made an election under TCGA92/S35 (5) out of the kink-test. The 31 March 1982 value of the shares is 123.5p per share. Therefore, the acquisition cost of the 1982 holding is £10,597. That is 1,000 x 123.5p per share for the shares held at 31 March 1982 plus the cost of the later rights issues.

In summary the 1982 holding is made up of 6,000 shares acquired as follows.

    Cost/31.3.82
     
Date Shares Value
November 1978 1,000 £1,235
November 1982 250 £862
December 1983 2,500 -
March 1984 1,250 £5,000
September 1987 1,000 £3,500
  6,000 £10,597

Because there is only one class of share you can make the apportionment by reference to the number of shares sold. Indexation allowance is only given on the rights issues from the date the additional expenditure became payable. The Capital Gains Tax computation is

          £
           
Disposal proceed         12,000
less Cost £10,597 x 3,000     5,299
6,000          
Unindexed gain         6,701
less Indexation March 1982 £1,235 x 3000 x 0.365 225  
6000          
November 1982 £862 x 3000 x 0.311 134  
6000          
April 1984 £5,000 x 3000 x 0.223 557  
6000          
October 1987 £3,500 x 3000 x 0.053 93 1,009
6000          
Chargeable gain         5,692

Because the taxpayer took up each rights issue in full you can use the Extel adjustment factors to check the taxpayer’s computation of the gain, see CG52050.

The Extel factor for AB Electronic Products Group PLC is 1.99643 which includes indexation allowance up to October 1987. Indexation allowance from October 1987 to September 1988 is 0.053.

Therefore the adjusted cost of 3,000 shares including indexation allowance is

3,000 x 1.99643 x 1.053 = £6,307

The capital gain is

  £
   
Disposal proceeds 12,000
less 6,307
Chargeable gain 5,693