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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Small capital distributions: computation: Section 104 holding

If the shares are held in a Section 104 holding, see CG50590, you reduce the pool of qualifying expenditure and the pool of indexed expenditure by the amount of the distribution, TCGA92/S110 (8)(d). The distribution is treated as an operative event, see CG51620. Therefore, you compute indexation allowance up to the date of the capital distribution.

EXAMPLE

  • March 1988 a taxpayer buys 10,000 £1 ordinary shares in X Ltd for £45,000.
  • September 1992 X Ltd reduces its share capital from £1 to 50p by distributing 50p in cash.

Immediately before the capital distribution the market value of the X Ltd shares was £11 per share.

Value capital distribution  = £5,000 x 100  = 4.5%

Value shareholding               £110,000

Therefore, you may accept that the capital distribution is small. You reduce the pool of qualifying expenditure and the pool of indexed expenditure by the amount of the capital distribution. This is an operative event. Indexation allowance is computed up to the date of the capital distribution.

SECTION 104 HOLDING

  NO OF SHARES POOL OF QUALIFYING EXPENDITURE POOL OF INDEXED EXPENDITURE
       
March 1988      
Acquisition 10,000 £45,000 £45,000
  Indexation    

March 1988-

September 1992 0.339     £15,255  
    10,000 £45,000 £60,255
  September 1992      
Capital distribution   (£5,000) (£5,000)  
    10,000 £40,000 £55,255

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+.