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Simplified CGT? Really Darling? - Investors Chronicle
The following piece was written by Moira O'Neill in the Investors Chronicle 19 - 25 June 2009 edition, discussing alleged "simplification" of the UK's capital gains tax (CGT) legislation and timetotrade's CGT Calculator. Thank you Moira.
Simplified CGT? Really Darling?
Preparing to complete your tax return? Then be aware that there are new capital gains tax rules to contend with for the 2008/09 tax year.
The UK's capital gains tax (CGT) 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 April 2008 by Alistair Darling was designed to address this. However, in reality it has just added an extra 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 holdings of those shares and match the disposals in a specific prescribed order called the Share Identification Rules.
Also 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.
With the withdrawal of Taper Relief and Indexation Allowance in 2008, to be replaced with a flat 18 per cent CGT rate, 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.
However, 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 prior to April 2008, before they can be added to the new Section 104 holding. To make matters more complicated, investors now have to supply Her Majesty's Revenue & Customs (HMRC) with a copy of all the underlying calculations used to determine their gain.
Accountants everywhere will be anticipating a boom in tax return business. If you don't want to hand your affairs to the comforting arms of an accountant but can't face doing the sums yourself, then timetotrade.eu has a capital gains tax calculator that 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. At £199 it doesn't come cheap, though this may be cheaper than using an accountant.
Over a 10-year period an investor makes the following five 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 6 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 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 5 April 2008; identifying 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.
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