This article is relevant to candidates sitting F6 (UK) in the period 1 September 2016 to 31 March 2017, and is based on tax legislation as it applies to the tax year 2015–16 (Finance Act 2015 and Finance (No 2) Act 2015).
The disposal of shares can create a particular problem. This is because the shares disposed of might have been purchased at different times, and it is then difficult to identify exactly which shares have been sold. Disposals of shares are matched with purchases in the following order:
The share pool aggregates all purchases made up to the day of the disposal.
Ivy has had the following transactions in the shares of Jing plc:
1 June 2008 – Purchased 4,000 shares for £6,200.
30 April 2013 – Purchased 2,000 shares for £8,800
15 July 2015 – Purchased 500 shares for £2,500
15 July 2015 – Sold 4,500 shares for £27,000
Ivy’s chargeable gain for 2015–16 is:
|Purchase 15 July 2015|
(27,000 x 500/4,500)
(27,000 x 4,000/4,500)
|Purchase 1 June 2008||4,000||6,200|
|Purchase 30 April 2013||2,000||8,800|
|Disposal 15 July 2015 (15,000 x 4,000/6,000)|
|Balance carried forward||2,000||5,000|
The disposal is first matched with the same day purchase and then against the share pool.
The reason that disposals are matched with shares purchased within the following 30 days is to prevent a practice known as bed and breakfasting. A person might sell shares at the close of business one day and then buy them back at the opening of business the next day. Previously, a chargeable gain or a capital loss could thus be established without a genuine disposal being made. The 30-day matching rule makes bed and breakfasting much more difficult, since the subsequent purchase cannot take place within 30 days.
Keith purchased 1,000 shares in Long plc on 5 July 2015 for £10,000. The shares have fallen in value, so he would like to establish a capital loss. Therefore, the shares were sold on 2 December 2015 for £2,000, and purchased back on 10 December 2015 for £1,900.
Keith’s transactions are caught by the 30-day matching rule. The disposal on 2 December 2015 will be matched with the purchase on 10 December 2015, and for 2015–16 he will therefore have a chargeable gain of £100 (2,000 – 1,900).
With individuals, it might be necessary to establish a market value figure where the shares are disposed of by way of a gift rather than being sold.
The market value of an asset is used rather than the actual proceeds when a gift is made between family members because they are connected persons.
Maude made a gift of her entire shareholding of 10,000 £1 ordinary shares in Night plc to her daughter. On the date of the gift, the shares were quoted at £5.10 – £5.18.
Where an unquoted company is concerned, a share valuation is based on the market value of the shares gifted rather than the diminution in value (this is the basis for inheritance tax purposes).
On 4 May 2015, Daniel made a gift to his son of 15,000 £1 ordinary shares in ABC Ltd, an unquoted investment company. Before the transfer, Daniel owned 60,000 shares out of ABC Ltd’s issued share capital of 100,000 £1 ordinary shares. ABC Ltd’s shares are worth £18 each for a holding of 60%, £10 each for a holding of 45% and £8 each for a holding of 15%.
The value of the gifted shares is £120,000 (15,000 x £8).
With a bonus issue, there is no additional cost involved. The only thing that changes is the number of shares held.
On 22 January 2016, Oliver sold 30,000 £1 ordinary shares in Pink plc for £140,000. Oliver had purchased 40,000 shares in Pink plc on 9 February 2014 for £96,000. On 3 April 2015, Pink plc made a 1 for 2 bonus issue.
Oliver’s chargeable gain for 2015–16 is:
With a rights issue, the new shares are paid for and so the cost figure will have to be adjusted.
On 22 January 2016, Quinn sold 30,000 £1 ordinary shares in Red plc for £140,000. Quinn had purchased 40,000 shares in Red plc on 9 February 2013 for £100,000. On 3 May 2015, Red plc made a 1 for 2 rights issue. Quinn took up her allocation under the rights issue in full, paying £3.00 for each new share issued.
Quinn’s chargeable gain for 2015–16 is:
A paper for paper takeover or reorganisation is not a chargeable disposal. The new shares simply take the place of the original shares and are deemed to have been purchased at the same time and for the same cost. Where more than one class of new share is acquired as a result of the takeover/reorganisation, the original cost is apportioned according to the market values of the new shares immediately after the takeover/reorganisation.
On 28 March 2016, Rita sold her entire holding of £1 ordinary shares in Sine plc for £55,000. Rita had originally purchased 10,000 shares in Sine plc on 5 May 2013 for £14,000. On 7 August 2014, Sine plc had a reorganisation whereby each £1 ordinary share was exchanged for two new £1 ordinary shares and one £1 preference share. Immediately after the reorganisation, each £1 ordinary share in Sine plc was quoted at £2.50 and each £1 preference share was quoted at £1.25.
Rita’s chargeable gain for 2015–16 is:
Where cash is received on a takeover, then the normal disposal rules will apply.
Cherry purchased 12,000 £1 ordinary shares in Alphabet Ltd on 27 July 2008 for £23,900. On 15 July 2015, Alphabet Ltd was taken over by ABC plc and Cherry received £6 for each of her shares in that company.
Cherry’s chargeable gain for 2015–16 is:
(12,000 x £6)
Where a takeover is partly for shares and partly for cash, then the part disposal rules will apply.
Richard purchased 10,000 £1 ordinary shares in Split plc on 21 July 2012 for £23,100. On 28 August 2015, Split plc was taken over by Combined plc. For each of his £1 ordinary shares in Split plc, Richard received two £1 ordinary shares in Combined plc plus £2.50 in cash. Immediately after the takeover, Combined plc’s £1 ordinary shares were quoted at £4.00.
Richard’s chargeable gain for 2015–16 is:
(10,000 x £2.50)
Rollover relief allows a chargeable gain to be deferred (rolled over) where the disposal proceeds of the old asset are reinvested in a new asset. The deferral is achieved by deducting the chargeable gain from the cost of the new asset.
To qualify for rollover relief, both the old asset and the new asset must be qualifying assets. The most relevant types of qualifying asset as far as F6 (UK) is concerned are:
It is not necessary for the old asset and the new asset to be in the same category.
What are the conditions that must be met in order that rollover relief can be claimed?
Where the disposal proceeds of the old asset are not fully reinvested in the new asset, then the amount not reinvested remains chargeable and the amount of gain that can be rolled over is correspondingly reduced. Therefore, if the amount not reinvested is greater than the chargeable gain, the full gain will be immediately chargeable and no rollover relief will be available.
Where the new asset is a depreciating asset, then the gain does not reduce the cost of the new asset but is instead held over. A depreciating asset is an asset with a predictable life of less than 60 years. The only types of depreciating asset that you need to be aware of are fixed plant and machinery and short leaseholds.
Violet sold a factory on 15 August 2015 for £320,000 and this resulted in a chargeable gain of £85,000. She is considering the following alternative ways of reinvesting the proceeds from the sale of her factory:
The reinvestment will take place during November 2015.
Freehold office building
When the asset disposed of was not used entirely for business purposes, then the proportion of the chargeable gain relating to the non-business use does not qualify for rollover relief.
Willow sold a freehold factory on 8 November 2015 for £146,000 and this resulted in a chargeable gain of £74,000. The factory was purchased on 15 January 2013. 75% of the factory had been used for business purposes by Willow as a sole trader, but the other 25% was never used for business purposes. Willow purchased a new freehold factory on 10 November 2015 for £156,000.
Willow’s chargeable gain for 2015–16 is:
|Rollover relief (74,000 – 18,500)||(55,500)|
Holdover relief allows a chargeable gain to be deferred (held over) when a gift is made of a qualifying business asset. The deferral is achieved by deducting the chargeable gain of the donor who has made the gift from the base cost of the donee who has received the gift.
Holdover relief is also available when a sale is made at less than market value (ie a partial gift). In this case, any excess of sale proceeds over the original cost of the asset will be immediately chargeable.
As far as F6 (UK) is concerned, the most relevant types of qualifying business asset are:
On 15 August 2015, Xia sold 10,000 £1 ordinary shares in Yukon Ltd, an unquoted trading company, to her daughter for £75,000. The market value of the shares on that date was £110,000. The shareholding was purchased on 10 July 2014 for £38,000. Xia and her daughter have elected to hold over the gain as a gift of a business asset.
Xia’s chargeable gain for 2015–16 is:
(72,000 – 37,000)
If a gift is going to result in an immediate chargeable gain, then it might be possible to restrict the gain to the amount of the annual exempt amount or any available capital losses.
Bertie has a holding of 6,000 £1 ordinary shares in Gift Ltd, an unquoted trading company, which he had originally purchased for £3.50 per share. The current market value of the shares is £8.50, but Bertie is going to sell some of the holding to his son at £6.00 per share during the tax year 2015–16. Bertie and his son will elect to hold over any gain as a gift of a business asset.
Where entrepreneurs’ relief is available, it may not be beneficial to claim holdover relief.
On 10 April 2015, Pia made a gift of her entire holding of 60,000 £1 ordinary shares (a 60% shareholding) in Zuper Ltd, an unquoted trading company, to her daughter Rita. Pia had purchased the shares on 1 June 2005 for £60,000, and was an employee of the company from that date until 10 April 2015. The market value of the shares on 10 April 2015 was £260,000.
Rita sold the 60,000 £1 ordinary shares in Zuper Ltd on 28 March 2016 for £270,000. She has never been an employee or a director of the company.
Both Pia and Rita are higher rate taxpayers, and neither of them made any other chargeable gains during the tax year 2015–16.
No election for holdover relief
Pia’s CGT liability for 2015–16 is:
|Annual exempt amount||(11,100)|
|Capital gains tax:|
188,900 at 10%
Election for holdover relief
Rita’s CGT liability for 2015–16 is:
|Held over again||200,000|
|Annual exempt amount||(11,100)|
|Capital gains tax:|
198,900 at 28%
Where the disposal consists of shares in a personal company, holdover relief will be restricted if the company has chargeable non-business assets.
On 5 October 2015, Zia made a gift of her entire holding of 20,000 £1 ordinary shares in Apple Ltd, a personal company, to her daughter. The market value of the shares on that date was £200,000. The shares had been purchased on 1 January 2013 for £140,000. On 5 October 2015, the market value of Apple Ltd’s chargeable assets was £150,000, of which £120,000 was in respect of chargeable business assets. Zia and her daughter have elected to hold over the gain as a gift of a business asset.
Zia’s chargeable gain for 2015–16 is:
Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), being the proportion of chargeable assets to chargeable business assets.
On 13 July 2015, Dear sold 1,000 of her 3,000 £1 ordinary shares in XYZ plc for £6,600. She died on 5 April 2016, and the remaining 2,000 shares were inherited by her daughter. On that date, these shares were valued at £15,600. The holding of 3,000 shares had been purchased on 20 June 2008 for £4,800.
You have seen how individuals are subject to CGT. Although there are a lot of similarities in the way in which the chargeable gains of a limited company are taxed, there are also some very important differences:
The basic computation for a limited company is virtually the same as for an individual. However, you may also be expected to calculate the indexation allowance:
Delta Ltd sold a factory on 15 February 2016 for £400,000. The factory was purchased on 24 October 1995 for £164,000, and was extended at a cost of £37,000 during March 1997.
Delta Ltd incurred legal fees of £3,600 in connection with the purchase of the factory, and legal fees of £6,200 in connection with the disposal. Retail price indices (RPIs) are as follows:
|Incidental costs of disposal|
|Incidental costs of acquisition|
– Cost 167,600 x 0.756
37,000 x 0.692
When a limited company has a capital loss, it is first set off against any chargeable gains arising in the same accounting period. Any remaining capital loss is then carried forward and set off against the first available chargeable gains of future accounting periods.
Although chargeable gains are included as part of a company’s taxable total profits, capital losses are never set off against other income.
Even Ltd has the following results:
31 March 2015
31 March 2016
|Property business profit||4,000||10,000|
The corporation tax liability of Even Ltd for the years ended 31 March 2015 and 2016 is:
31 March 2015
31 March 2016
|Property business profit||4,000||10,000|
|Taxable total profits||60,000||70,000|
|Corporation tax at 20%||12,000||14,000|
For limited companies, disposals of shares are matched with purchases in the following order:
When calculating indexation allowances for the 1985 pool, the indexation fraction is not rounded to three decimal places.
On 15 June 2015, Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £400,000. Fair Ltd had originally purchased 40,000 shares in Gong plc on 10 June 1995 for £110,000, and purchased a further 60,000 shares on 20 August 1999 for £180,000. Retail price indices (RPIs) are as follows:
|Purchase June 1995||40,000||110,000|
(165.5 – 149.8)/149.8
(259.0 – 165.5)/165.5
|Disposal June 2014|
471,879 x 70,000/
|Balance carried forward||30,000||141,564|
Written by a member of the F6 (UK) examining team