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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Capital distributions: definition: part disposal

The normal computational rules for part-disposals apply. No shares are actually sold. Therefore you cannot apportion the allowable cost by reference to the number of shares sold, see CG51575. You must use the usual part-disposal formula in TCGA92/S42


A + B

A = the amount or value of the capital distribution.

B = the market value of the shareholding.


  • March 1988 Mr Daley buys 10,000 £1 ordinary shares in Discount Motors Ltd for £18,000. Discount Motors Ltd has a small holding of shares in Ace Cars Ltd.
  • September 1992 Discount Motors Ltd reduces its £1 ordinary shares to 5p shares. It distributes 75p in cash and one 50p share in Ace Cars Ltd for every £1 ordinary share held. Discount Motors Ltd then restores its 5p shares to £1 by capitalising 95p per share out of reserves.

The market value of the Ace Cars Ltd shares at the time of the capital reduction is 20p.

The market value of the Discount Motors Ltd £1 ordinary shares after the capital reorganisation is 110p.

You compute the value of the capital distributions as follows

Cash 10,000 x 75p = £7,500
Shares 10,000 x 20p = £2,000

The value of the shareholding retained is 10,000 x 110p = £11,000.


Pool of indexed expenditure

£24,102 x          £9,500                 = £11,169

                   £9,500 + £11,000

Pool of qualifying expenditure

£18,000      x     £9,500                             = £8,342

                        £9,500 + £11,000


Indexation =             £11,169 - £8,342                = £2,827

  Disposal proceeds   9,500
less Cost   8,342
    Unindexed gain 1,158
less Indexation   2,827
    Allowable loss (1,669)

Mr Daley is deemed to have acquired the Ace Cars Ltd shares at a cost of £2,000.

The restoration of the Discount Motors Ltd 5p shares to £1 shares is treated as an income distribution, see CT1542. The net amount of the distribution is added to the allowable cost of the shareholding, see CG51825. 10,000 x 95p = £9,500.


  No of Shares Pool of qualifying Expenditure Pool of indexed expenditure
March 1988Acquisition 10,000 £18,000 £18,000
Indexation March 88- Sept 92 0.339     £6,102
  10,000 £18,000 £24,102
September 1992      
Capital distribution   (£8,342) (£11,169)  
    10,000 £9,658 £12,933
  Income distribution   £9,500 £9,500
    10,000 £19,158 £22,433

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+.