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Capital gains on shares 24th January 2014

Posted in: Capital Gains Tax

For those of you who have shares, you may wonder how HMRC calculate the capital gains on your shares when they are disposed.

There are special rules regarding capital gains on shares, as the following will illustrate.

Frances has purchased a number of shares in ABC Ltd, a quoted company, over a period of many years as follows:

Date Shares Cost (£)
Mar 1986 1,000 1,000
Jun 1991 2,000 6,000
Sep 1996 3,000 12,000
Dec 2010 4,000 24,000
Total 10,000 43,000

In February 2013, Frances sells 4,000 shares for £28,000

Her capital gain is:

Proceeds 28,000
Less: cost ?
Capital gain ??

This is the problem, as we cannot tell which of the 4,000 shares Frances has sold. Was it the first 4,000 she purchased or the last 4,000 she purchased or something else?

Share matching rules

HMRC apply matching rules to determine the order in which shares are deemed to have been sold. Note, these matching rules only apply for individuals, not companies that hold shares. Further, the rules only apply to shares of the same class in the same company.

There are 3 matching rules applied in order of priority:

  1. First, shares disposed of will be matched with any shares acquired on the same day.
  2. Next, the shareholder is deemed to have sold any shares s/he acquires in the next 30 days after purchase.
  3. Finally, the disposal is matched with all other shares acquired that are pooled together – this is imaginatively known as the “Section 104 pool”.

The reason HMRC have matching rule 2 above is to prevent the practice of “bed and breakfasting”. This is where a taxpayer would sell off enough shares each tax year to realise a gain exactly equal to their capital gains tax annual allowance and then buy those shares back again the next day. This would have the effect of keeping the shareholders share portfolio intact while increasing the effective cost of the shares held, which would in turn reduce the capital gain when the shares were really disposed of.

If we return to Frances and her share disposal, we can see that she has no shares caught by matching rules 1 and 2 and all her shares fall into the Section 104 pool.

Date Shares Costs (£)
Mar 1986 1,000 1,000
Jun 1991 2,000 6,000
Sep 1996 3,000 12,000
Dec 2010 4,000 24,000
Total 10,000 43,000
Less: sale Feb 2013 (sold 40%) (4,000) (17,200)
Balance c/fwd 6,000 25,800

Her capital gain is therefore:

Proceeds 28,000
Less: cost (above) (17,200)
Capital gain 10,800