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Share Identification Rules: Pre 2008

Simplified? Really Darling?
The Chancellor admitted he got it wrong on the economy. Has he also got it wrong with the so-called “Simplification” of the new Capital Gains Tax (CGT) rules?

Introduction
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.

In order to calculate capital gains (or losses) on the sale of your shares, you need to determine the ‘base cost’ for those shares. If you have bought shares of the same class in the same company at different times and then sell just part of your shareholding in that company - how do you know which shares have been sold and therefore what acquisition price or ‘base cost’ you should be using to calculate your gain?

To get around this problem, HMRC impose special rules stipulating exactly which shares have been sold. These rules are called the Share Identification Rules.

A Bit of History
The UK’s Capital Gains Tax legislation has evolved rather haphazardly over the years, creating a system that is a complete minefield with a mish-mash of rules, reliefs and allowances that have changed with each new government. The “Simplification” of the legislation in 2008 was designed to address this, however in reality it has just added one more layer of complexity.

Prior to April 2008, when you sold shares of the same class in the same company that had been acquired at different times you would look at your holding of those shares and match the disposals in the following very specific order

Pre - 2008 Rules
Shares sold were matched with:

1) shares acquired on the same day as the disposal

2) shares acquired 30 days following the day of disposal, matched on a “first in first out basis”

3) shares acquired between 6 April 1998 and the 5 April 2008, identifiying the shares on a “last in first out” basis

4) shares acquired between 1 April 1982 and 5 April 1998 (these shares are treated as a single asset, the price averaged to form what is known as a “Section 104 Holding”)

5) shares acquired between 7 April 1965 and 31 March 1982 - these shares are treated as a single asset, again the price averaged to form what is called a “1982 Holding”. and finally, with

6) shares held prior to 6 April 1965, matched on a “last in first out basis”.

Prior to April 2008, gains on shares purchased between 1998 and 2008 were reduced by Taper Relief, whilst shares bought between 1982 and 1998 benefited from Indexation Allowance. Both reliefs were based on the period of ownership and were designed to ensure you did not pay tax on inflationary gains.

Post - 2008 Rules
With the withdrawal of Taper Relief and Indexation Allowance in 2008 the Share Identification Rules have been “simplified” such that all shares of the same class in the same company are now pooled together, their cost averaged to form a new “Section 104” Holding which is treated as a single asset. Sales are matched with acquisitions in the following order:

1) shares acquired on the same day as the disposal

2) shares acquired 30 days following the day of disposal

3) shares bought prior to disposal, making up the “Section 104” pool

The question is, if you have bought and sold shares in the same company at different times prior to 2008 and still own some of those shares after 6 April 2008, how do you know which shares go to make up the new pooled “Section 104 Holding?”.

The answer, somewhat unfortunately, is that you still have to apply the old pre-2008 rules to determine which shares you are actually deemed to own as at 6 April 2008, so that you know which shares are pooled together to make up the new Section 104 Holding.

To give you an idea of the additional complexity, let us consider the following scenario: An investor has been buying shares over the last 10 years and during this time they have made a part disposal of their share holding. In order to work out their gains on future disposals the investor must firstly apply the old Share Identification rules to work out which shares and associated costs go to make up the new post-2008 Section 104 Holding.



Example
Over a 10 year period an investor makes the following 5 share transactions:

May 1997 buy 100 ABC plc @ 100p
May 2000 buy 100 ABC plc @ 150p
May 2005 buy 100 ABC plc @ 200p
May 2007 sell 200 ABC plc @ 300p
May 2007 buy 100 ABC plc @ 250p


So which shares is the investor deemed to be holding at 6th April 2008 which will go to form the new Section 104 Holding?

Applying the pre-2008 Share Identification rules, the sale of 200 shares in May 2007 sale is identified firstly with shares acquired 30 days following the day of disposal, ie the 100 shares bought at 250p.

Next they are matched with any shares acquired between 6 April 1998 and the 5 April 2008; identifiying the shares on a “last in first out” basis the shares are matched with the May 2005 purchase @ 200p.

It’s only after applying the pre-2008 rules, that we know which shares the investor is deemed to hold as at 6 April 2008. In this example the new Section 104 Holding would be deemed to be made up of shares acquired:

May 1997 buy 100 ABC plc @ 100p
May 2000 buy 100 ABC plc @ 150p

So, the new holding would be made up of 200 shares with a combined purchase price of £250, giving an average cost per share of 125p.

As you can see, the new tax rules have done nothing to ease the number of calculations - investors still have to go through the old complicated calculations to work out the cost of the shares owned before they can be added to the new Section 104 Holding.

To make matters more interesting, investors now have to supply the HMRC with a copy of all of the underlying calculations used to determine their gain.

In this example we looked at just 5 shares transactions over a 10 year period of time - a perfectly feasible scenario for an average investor. Remember as well, that Forex and units purchased in a unit trust or OEIC are subject to exactly the same identification rules as shares.

Can you imagine the work involved if someone has been making regular monthly savings into a unit trust over a ten year period, with the occasional withdrawal of money?

As Dary Mc Govern of timetotrade has said, “This is hardly a simplification, Alistair’s new share pooling scheme means investors have yet another rule to get their heads around – making tax returns even more taxing!”

However, do not fear ... help is at hand! timetotrade’s Capital Gains Tax Calculator does all the hard work for you. Just input all of your historic share and unit trust transactions and timetotrade works through the Share Identification rules, calculating your gains and even producing the supporting calculations to send to HMRC.


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