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Prepare for the great CGT hike - Investors Chronicle
Created: 8 September 2009 Written by: Maike Currie Link to article in the Investors Chronicle
Extract: "The rules for calculating CGT on shares still baffles most investors, and a number of readers have requested an article on how the rules governing this work. Dary McGovern, managing director of online trading tool provider, timetotrade, explains that in order to calculate your capital gain or loss when you sell shares, you need to know the acquisition cost or 'base cost' of those shares. This base cost is deducted from the sale proceeds in order to work out the capital gain.
One feature of shares is that unless they are numbered (and most shares are not), all shares of the same class in the same company are identical. If you have accumulated shares of the same class in the same company over a long period of time at different costs and then sell just part of your shareholding in that company - how do you know which of the shares have been sold and therefore what acquisition price or 'base cost' you should be using to calculate your capital gain?
To get around this problem, HM Revenue & Customs (HMRC) introduced the 'Share Identification Rules', a set of rules which define the exact order in which acquisitions are matched to sales. When you sell shares in a company, you need to look at your overall holding of shares in that particular company and match the disposals with shares purchased in the following order:
- Shares acquired on the same day as the disposal
- Shares acquired in the 30 days following the date of disposal, matched on a first-in, first-out basis (this is called the 'bed and breakfasting' rule)
- Shares acquired before the disposal date, which are pooled together and their cost averaged (a 'Section 104' holding).
"The 'same day' and 30-day 'bed and breakfasting' rules were designed specifically to stop investors manipulating their CGT liabilities by disposing of shares and buying them back shortly afterwards for the purpose of realising a capital gain free of tax (because, for example, it is covered by the annual exempt amount) or a capital loss while still, in effect, holding on to the investment," explains Mr McGovern.
The effect of the rules means that in situations where shares in a company are sold and repurchased shortly afterwards, the capital gain or loss is calculated as though the shares disposed of are those acquired either the same day or within the 30-day period following the disposal. In such circumstances, the price received on the disposal is generally similar to the price paid shortly afterwards to repurchase the shares. As a result of the rules, any gain or loss arising on the disposal is likely to be small."
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