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UK HMRC: Share Identification Rules

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. This quality is called fungibility. There are other fungible assets for example, foreign currency, or units purchased in a unit trust or OEIC.

Because you cannot tell shares of the same class in the same company apart it is necessary to have a set of identification rules to determine which shares have been disposed of. These rules, known as the "Share Identification Rules", apply even if you can identify the shares in some other way. They also apply to the other fungible asset types as well.

Over the years the UK Capital Gains Tax rules have been adjusted and re-written and amended so many times that it was a legislative minefield. So, from April 2008 HMRC introduced the "Simplification of Capital Gains Tax" and we saw the withdrawal of Taper Relief, the abolition of the Kink Test and the removal of Indexation Allowance. In addition, the Share Identification Rules were amended - again, under the guise of simplifying the Capital Gains Tax system - but with the unintended consequence of complicating it still further!

The sale of shares (or forex, or unit trusts) are identified in the following order:

Pre April 1998 Any shares sold are identified with:

  • Shares acquired and sold on the same day
  • Shares acquired within 30 days of the sale
  • shares held in a "section 104 pool" *

April 1998 to April 2008 Any shares sold are identified with: - Shares acquired and sold on the same day (as a 'scalper' might) are identified together - Shares acquired within 30 days of the sale - Shares purchased between 1998 and 2008, identified on a last in first out basis - Shares acquired before April 1998 - Shares acquired before April 1982

Post April 2008 - Shares acquired and sold on the same day (as a 'scalper' might) are identified together - Shares acquired within 30 days of the sale - shares held in the new "section 104 pool"

To illustrate the problem, let us look at the following purchases and sales made by an investor from in 1997 to 2009.

01 Feb 1997 - purchase 500 shares in ABC plc @ 100p
01 March 1997 - purchase 1000 shares in ABC plc @ 200p
01 June 2005 - purchase 250 shares in ABC plc @ 300p
01 March 2008 - sell 300 shares in ABC plc @ 400p
01 May 2008 - sell 250 shares in ABC plc @ 450p
25 May 2008 - buy 100 shares in ABC plc @ 300p

The investor has made 6 transactions in shares in the same company over a 10 year period - certainly not an inconceivable number.

Firstly, we need to identify which holding the shares belong to. Let us take a look at each in turn.

The shares acquired before 6 April 1998 form an 'original' Section 104 Holding. Their costs are averaged, giving us a pooled asset made up of 1,500 shares costing a total £2,500 (or 166.67p each).

The shares acquired on 1 June 2005, belong to the 1998 - 2008 Holding.

The sale of 300 shares on 1 March 2008 comes under the old Pre 2008 rules, so we must identify the sale with the purchases in the following order

250 shares purchased on 01 June 2005 @ 300p, and 50 shares from the 'original' Section 104 pool, average purchase price 166.67p

This leaves us with 1450 shares left in the 'original' Section 104 pool, average price 166.67p to carry over into the new post 2008 Section 104 pool.

Now, moving into Post 2008 rules, there is a disposal of 250 shares in ABC plc on 1 May 2008. This is followed by a purchase 25 days later for a further 100 shares in the company. As this new purchase falls within the 30 day bed and breakfasting period, the disposal of 250 shares is firstly identified with the purchase of 100 shares.

As at June 2005 the investor owns 2000 shares in ABC plc on which he had spent . In order to work out the capital gain on the sale of the shares, you need to know which shares the investor sold and how much they cost. On 1 May 2008 there was a sale of 250 shares. These are identified with the purchase of 100 shares made on 25 May 2008 (30 day rule) and the shares making up the the new post April 2008 Section 104 pool.

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