CG/APP10 - Interim Guidance on Share Identification for CGT following FA 2008 changes
Share identification rules: Capital Gains Tax from 6.4.2008: Section 104 holding
Share pooling was reintroduced for disposals on or after 6 April
2008 for those within the charge to Capital Gains Tax. Shares of
the same class in the same company acquired at any time by a person
in the same capacity will normally become part of the Section 104
holding. The Section 104 holding is simply the share pool. However,
shares that are identified with acquisitions under the ‘same
day’ or `bed and breakfasting' identification rules do not
become part of the pool.
The Section 104 holding is a pool of qualifying expenditure
as regards the number of shares in the holding.
The pool grows whenever further shares are acquired that
enter the pool and reduces when there is a disposal of shares from
the pool.
For disposals on or after 6 April 2008 –
- No indexation allowance is included in any calculation
- Any shares held on 6 April 1982 are included at their value on 31 March 1982. It is not necessary to consider whether they should be included at their original cost (the “kink test”).
Share identification rules: share disposals: CGT cases from 6.4.2008
TCGA92/S106A
For individuals and others within the charge to Capital Gains Tax on disposals of shares on or after 6 April 2008 the previous identification rules were simplified with the reintroduction of the Section 104 holding for new acquisitions and its widening to include all shares acquired before 31 March 1982 and after 5 April 1998. Section 106A provides that, for matching acquisitions and disposals of shares of the same class in the same company held in the same capacity
- the identification rules set out below apply, even if the particular shares were identified in some other way when they were disposed of, or when they were transferred or delivered to the acquirer
- disposals must be identified in the following order:
- Against acquisitions on the same day, TCGA92/S105(1)(b), see
CG50822. This is known as the “same day rule”.
- Against acquisitions within the 30 days following the disposal,
provided the person making the disposal was resident in the United
Kingdom at the time of the acquisition, TCGA92/S106A(5) and (5A),
see CG50566. This is known as the “bed and breakfast”
rule.
- Against shares in a Section 104 holding, but without
identifying any particular shares in that holding, TCGA92/S104.
- Finally against acquisitions following the disposal (and not
already identified under stage 2 above), taking the earliest
acquisition first, TCGA92/S105(2).
Note that in relation to disposals after 5 April 2008 TCGA92/S105(3) and TCGA92/S106A(5ZA) make it clear that shares identified in accordance with points 1 & 2 above do not enter the S104 holding.
Share identification rules: share disposals: the “same day” and “bed and breakfast” identification rules
The “same day” rule TCGA92/S105(1)
All shares of the same class in the same company acquired by the
same person on the same day and in the same capacity are treated as
though they were acquired by a single transaction, TCGA92/S105
(1)(a).
All shares of the same class in the same company disposed of
by the same person on the same day and in the same capacity are
also treated as though they were disposed of by a single
transaction, TCGA92/S105 (1)(a).
If there is an acquisition and a disposal on the same day
the disposal is identified first against the acquisition on the
same day, TCGA92/S105 (1)(b).
If the number of shares disposed of exceeds the number
acquired on the same day the excess shares will be identified in
the normal way.
If the number of shares acquired exceeds the number sold on
the same day the surplus is added to the Section 104 holding,
unless they are identified with disposals under the ‘bed and
breakfast’ rule, see below.
The “bed and breakfast” rule TCGA92/S106A(5) and (5A)
The rule was introduced in 1998 to counter what is known as `bed
and breakfasting' of shares. For a general discussion on `bed and
breakfasting' see CG13350+.
Disposals must be identified with acquisitions of shares
- of the same class, see CG50205-50206
- acquired by the same person in the same capacity, and
- acquired within the 30 days after the disposal.
This rule has priority over all other identification rules
except the `same day' rule in TCGA92/S105(1), see CG50822.
This ‘bed and breakfasting’ rule does not apply
if the person who makes the disposal was not resident in the United
Kingdom for tax purposes at the time of the relevant acquisition if
that acquisition was on or after 22 March 2006, irrespective of the
time of the disposal. Where this is the case, the usual share
identification rules apply, see CG50564. Where the 30 day
identification rule applies it will normally have the effect of
reducing or eliminating the gain or loss which would have arisen if
the disposal had been identified with shares already held.
The three requirements above (same class, same capacity,
later acquisition within 30 days) must be met for the rule to
operate. For example, a disposal by an individual in a personal
capacity followed by an acquisition as trustee of a trust would not
be subject to the rule. Other transactions which do not come within
the scope of the rule are
- a disposal of shares followed by a company reorganisation (such as a rights issue or bonus issue) to which TCGA92/S127 applies, see CG51700+, with the result that the additional shares are not treated as acquired within the 30 days following the disposal
- a disposal of rights which is treated as a part disposal of an interest in shares under TCGA92/S122 and S123, see CG57835+, followed by an acquisition of shares (with no rights attached).
The following examples illustrate how the 30 day identification rule works.
EXAMPLE 1
Miss A has a Section 104 holding of 1,000 ordinary £1
shares in X plc. On 1 July 2011 she sells the whole 1,000 shares.
She buys the same number of ordinary £1 shares in X plc on 31
July 2011.
The acquisition is within the 30 day period after the
disposal, so the disposal and later acquisition are matched in
priority to identifying the disposal with the shares in the Section
104 holding.
EXAMPLE 2
Mr B has a Section 104 holding of 2,500 ordinary 10p shares in Y
plc. On 27 March 2012 he sells 1,700 shares. On 30 March 2012 he
buys another 500 10p shares in Y plc.
The later acquisition of 500 shares does not become part of
the Section 104 holding. They are identified with 500 of the shares
disposed of on 27 March. The remaining 1,200 shares sold are
identified with part of the Section 104 holding.
EXAMPLE 3
Mrs C has a Section 104 holding of 10,000 ordinary 25p shares in
Z plc. On 28 February 2009 she sells 2,000 shares. On 31 March 2009
she buys another 3,000 of the same shares.
Mrs C's acquisition is not within the 30 days after the
disposal. So her disposal cannot be identified under the 30 day
rule with 2,000 of the 3,000 shares bought on 31 March. The shares
disposed of are therefore identified with part of the Section 104
holding.
Share identification rules: CGT treatment of shares from 6.4.2008: treatment of relevant securities
Certain “relevant securities” are not subject to the
pooling arrangements. The reintroduction of pooling from 6 April
2008 means that a separate rule is again needed for the purposes of
Capital Gains Tax. The TCGA92/S106A(6) rule which identifies
disposals against acquisitions on a last in first out (LIFO) basis
now applies only to “relevant securities” and these are
defined for Capital Gains Tax purposes at TCGA92/S106A(10).
Relevant securities do not form part of a Section 104
holding; TCGA1992/S104(3).
Share identification rules: shares held before 6.4.2008 – converting to the new Section 104 holding.
Where shares that were acquired before 6 April 2008 are disposed
of on or after that date it will usually be necessary to create a
Section 104 pool to calculate the chargeable gain although this
step will be academic where all of the shares held are disposed of
in a single transaction or in the same tax year.
A S104 pool is simply the amount of qualifying expenditure
that relates to the number of shares in the holding.
The number of shares held and the related cost will comprise
–
- shares still held that were acquired before 6 April 1965; their ‘cost’ (see note below) reflecting any previous disposals on a LIFO basis, see CG50970+.
- any remaining 1982 holding, the ‘cost’ (see note below) of the holding reflecting any previous part disposal out of the holding, see CG50870+.
Note that for any shares transferred into the Section 104 holding that were held at 5 April 1982, the sum that goes into the Section 104 holding will be their value at 31 March 1982 and not their original cost.
- Any previous Section 104 holding, the cost of the holding being the pool of qualifying expenditure and not the pool of indexed expenditure, see CG50534 and CG50590+.
- Shares held that were acquired from 6 April 1998 to 5 April 2008, to the extent that they have not been identified under the rules for disposals before 6 April 2008, see CG50572.
- The shares acquired on or after 6 April 2008 at cost.
Bear in mind that shares will not enter the pool if they are
identified under the “same day” or “bed and
breakfast” rules.
On a disposal of shares from the pool the associated cost
may be calculated by applying the part disposal formula of
TCGA92/S42 or by making a simple apportionment by reference to the
number of shares in the pool, see CG50728.
Share identification rules: CGT treatment of shares from 6.4.2008 onwards: clogged shares
Shares are held in a separate Section 104 holding if they are acquired as an employee on terms which restrict their right to dispose of them, TCGA92/S104(4). This applies to any employee, not merely an employee of the company issuing the shares. Such shares are known as ‘clogged shares’.
- IDENTIFICATION OF DISPOSALS
If the taxpayer holds `unclogged shares' (in other words, shares
which he acquired otherwise than as an employee with restricted
disposal rights) as well as clogged shares, there is no rule for
identifying whether it is clogged or unclogged shares which have
been disposed of. In practice it should be possible to identify as
a matter of fact which shares have been sold. If it is not possible
to identify whether clogged or unclogged shares were sold you
should accept the taxpayer's allocation. For further details on
employee share schemes, see CG56300+. However, if the restrictions
on the rights to dispose of the clogged shares are lifted before
the date of disposal for CGT purposes then they will have become
part of the section 104 holding of unclogged shares at the time of
the disposal.
“Clogged” shares become part of the main S104
holding when the restrictions on the rights to dispose of are
lifted (or lapse). Holdings of shares with different restrictions
form separate pools for capital gains purposes. Shares that have
the same restriction that applies for different periods form a
single pool. For example, shares are issued to an employee that
cannot be sold for 3 years; they are issued at 6 monthly intervals
so the restrictions end at various dates. All the shares that are
for the time being subject to the restriction should be treated as
a single holding.
Share identification rules: CGT treatment of shares from 6.4.98: stock dividends
TCGA92/S142
A stock dividend before 6 April 1998 which is treated as income
under ICTA88/S249 is a share reorganisation as defined in
TCGA92/S126. Stock dividends within Section 249 paid on or after 6
April 1998 are not treated as share reorganisations. Instead new
TCGA92/S142 treats them as a new acquisition of shares, with the
cost of acquisition being the `appropriate amount in cash' under
Section 249.
Further guidance on stock dividends is at CG58750+, and at
CG33800+ for stock dividends paid in respect of shares held by
trustees. Guidance on the income tax treatment is at CT1700+.
Share identification rules: CGT treatment of share disposals from 6.4.2008: examples
The following examples illustrate how acquisitions and disposals
of shares are treated for Capital Gains Tax purposes in 2008-09 and
later years. The examples are similar to those used in CG50579
below (those examples apply for disposals from 6 April 1998 to 5
April 2008).
In each example it should be assumed that all acquisitions
and disposals are arm's length transactions in shares listed on the
stock exchange. The shares are all of the same class in the same
company and held by a UK taxpayer in the same capacity. Figures for
disposal proceeds are net of incidental costs of disposal.
EXAMPLE 1
Ms Davy makes the following acquisitions and disposals
- on 15 April 2006 she buys 1,000 shares for £1,300
- on 4 August 2006 she buys another 1,000 shares for £1,450
- on 19 January 2007 she buys a further 500 shares for £950
- on 16 March 2010 she sells 2,000 shares for £6,850
- on 7 April 2010 she buys another 2,000 shares for £6,790
- on 10 December 2010 she sells 2,200 shares for £7,700.
Some of Ms Davy's purchases were made before 5 April 2008, but her disposals are made after that date so the pooling arrangements apply. Under TCGA92/S106A, see CG50464, her disposals must be identified with acquisitions in the following order
- disposal on 16 March 2010 - this is matched with the 2,000 shares acquired on 7 April 2010. A gain £60 (£6,850 - £6,790) arises. Because the shares bought on 7 April are identified under the “bed and breakfast” rule, they do not enter the pool.
- disposal on 10 December 2010 - this is a part disposal from the Section 104 holding.
Before the disposal, the Section 104 holding comprised the
following –
Shares: 1,000 + 1,000 + 500 = 2,500
Cost: £1,300 + £1,450 + £950 = £3,700
Ms Davy sold 2,200 out of 2,500 shares so on a simple
apportionment the shares sold have a cost of £3,256. Her
chargeable gain is therefore £7,700 - £3,256 =
£4,444.
The Section 104 holding remaining after the disposal
comprises 300 shares at a cost of £444.
EXAMPLE 2
Mr Browne makes the following acquisitions and disposals
- on 17 August 2008 he buys 10,000 shares for £2,500
- on 1 April 2009 he buys 10,000 shares for £2,600
- on 8 October 2009 he takes up a 1 for 5 rights issue at a cost of £960, and receives a further 4,000 shares
- on 10 December 2012 he sells 7,500 shares for £3,000.
The 1 for 5 rights issue is a reorganisation of the company's
share capital to which TCGA92/S127, see CG51700+, applies. The
rights issue shares and their cost are simply added to the Section
104 holding.
Shares: 10,000 + 10,000 +4,000 = 24,000
Cost: £2,500 + £2,600 + £960 = £6,160
Mr Browne sold 7,500 out of 24,000 shares so on a simple
apportionment the shares sold have a cost of £1,925. His
chargeable gain is therefore £3,000 - £1,925 =
£1,075.
The Section 104 holding remaining after the disposal
comprises 16,500 shares at a cost of £4,236.
EXAMPLE 3
Mrs Mountain makes the following acquisitions and disposals
- on 27 May 1979 she buys 7,500 shares for £18,750. These were worth £21,000 on 31 March 1982
- on 6 February 1988 she buys another 4,000 shares for £16,500
- on 28 July 1993 she buys another 4,000 shares for £17,000
- on 31 March 2005 she buys another 6,000 shares for £29,000
- on 13 June 2013 she sells 16,500 shares for £114,675.
Up to 5 April 2008, Mrs Mountain's 1979 purchase formed a 1982
holding, the 1988 and 1993 purchases together formed a Section 104
holding and the 1999 purchase were treated as a number of
individual assets.
These distinctions are not relevant in calculating the
chargeable gain on the disposal in 2013.
Before the disposal, the Section 104 holding comprised the
following –
Shares: 7,500 + 4,000 + 4,000 + 6,000 = 21,500
Cost: £21,000 (market value at 31 March 1983 replaces
cost for shares held on that date) + £16,,500 + £17,000 +
£29,000 = £83,500
Note that the costs carried from the “old”
Section 104 holding do not include indexation.
Mrs Mountain sold 16,500 out of 21,500 shares so on a simple
apportionment the shares sold have a cost of £64,081. Her
chargeable gain is therefore £114,675 - £64,081 =
£50,594.
The Section 104 holding remaining after the disposal
comprises 5,000 shares at a cost of £19,419.
EXAMPLE 4
The trustees of the Peninsula Trust make the following acquisitions and disposals
- on 24 September 1997 they buy 15,000 shares for £6,750
- on 30 January 2001 they take up in full a 3 for 5 rights issue at 40p a share, receiving an extra 9,000 shares for £3,600
- on 14 June 2004 they buy a further 12,000 shares for £13,800
- on 26 November 2005 they take up in full a further 1 for 4 rights issue at 105p per share, receiving another 9,000 shares for £9,450
- on 23 February 2010 they sell 20,000 shares for £39,000.
Up to 5 April 2008, the shares acquired on 24 September 1997
together with those acquired in the rights issue on 30 January 2001
and some of those acquired in the rights issue on 26 November 2005
formed a Section 104 holding. The shares acquired in June 2005 and
the remaining shares acquired in the rights issue in November 2005
were treated as a number of individual assets.
These distinctions are not relevant in calculating the
chargeable gain on the disposal in 2010. In particular, it is not
necessary to break down the second rights issue to arrive at the
trustees’ chargeable gain on this disposal.
Before the disposal, the trustees’ Section 104 holding
comprised the following –
Shares: 15,000 + 9,000 + 12,000 + 9,000 = 45,000
Cost: £6,750 + £3,600 + £13,800 + £9,450
= £33,600
Note that the costs carried from the “old”
Section 104 holding do not include indexation.
The trustees sold 20,000 out of 45,000 shares so on a simple
apportionment the shares sold have a cost of £14,934. Their
chargeable gain is therefore £39,000 - £14,934 =
£24,066.
The Section 104 holding remaining after the disposal
comprises 25,000 shares at a cost of £18,666.
