This article is relevant to those sitting the TX-UK exam in the period 1 June 2021 to 31 March 2022, and is based on tax legislation as it applies to the tax year 2020–21 (Finance Act 2020).
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 by an individual 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:
Ivy’s chargeable gain for 2020–21 is:
|Purchase 15 July 2020|
(27,000 x 500/4,500)
(27,000 x 4,000/4,500)
|Purchase 1 June 2013||4,000||6,200|
|Purchase 30 April 2018||2,000||8,800|
|Disposal 15 July 2020|
(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 2020 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 2020 for £2,000 and purchased back on 10 December 2020 for £1,900.
Keith’s transactions are caught by the 30-day matching rule. The disposal on 2 December 2020 will be matched with the purchase on 10 December 2020, and for 2020–21 he will therefore have a chargeable gain of £100 (2,000 – 1,900).
However, it is still possible to achieve a similar result as that prevented by the bed and breakfasting 30-day matching rule:
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 required to establish the market value of the shares gifted (note this is different from the diminution in value basis used for inheritance tax purposes).
On 4 May 2020, 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 which changes is the number of shares held.
On 22 January 2021, 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 2019 for £96,000. On 3 April 2020, Pink plc made a 1 for 2 bonus issue.
Oliver’s chargeable gain for 2020–21 is:
With a rights issue, the new shares are paid for and so the cost figure will have to be adjusted.
On 22 January 2021, 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 2018 for £100,000. On 3 May 2020, 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 2020–21 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 2021, 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 2018 for £14,000. On 7 August 2019, 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 2020–21 is:
Where cash is received on a takeover, then the normal disposal rules will apply.
Chai purchased 12,000 £1 ordinary shares in Beta Ltd on 27 July 2013 for £23,900. On 15 July 2020, Beta Ltd was taken over by ABC plc and Chai received £6 for each of her shares in that company.
Chai’s chargeable gain for 2020–21 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 2017 for £23,100. On 28 August 2020, 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 2020–21 is:
(10,000 x £2.50)
Rollover relief allows a chargeable gain to be deferred (rolled over) where the disposal proceeds received on the disposal of a business asset are reinvested in a new business 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 and used in the trade of the claimant. The most relevant types of qualifying asset as far as TX-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 which 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 which 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 which you need to be aware of are fixed plant and machinery and short leaseholds.
Violet sold a factory on 15 August 2020 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 2020.
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 2020 for £146,000 and this resulted in a chargeable gain of £74,000. The factory was purchased on 15 January 2018. 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 2020 for £156,000.
Willow’s chargeable gain for 2020–21 is:
|Rollover relief (74,000 – 18,500)||(55,500)|
Holdover relief (also known as gift 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. In this case, any excess of sale proceeds over the original cost of the asset will be immediately chargeable.
As far as TX-UK is concerned, the most relevant types of qualifying business asset are:
On 15 August 2020, 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 2019 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 2020–21 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 8,000 £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 2020–21. Bertie and his son will elect to hold over any gain as a gift of a business asset.
Where business asset disposal relief is available, it may not be beneficial to claim holdover relief.
On 10 April 2020, 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 2010 for £60,000, and was an employee of the company from that date until 10 April 2020. The market value of the shares on 10 April 2020 was £260,000.
Rita sold the 60,000 £1 ordinary shares in Zuper Ltd on 28 March 2021 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 2020–21.
No election for holdover relief
Pia’s CGT liability for 2020–21 is:
|Annual exempt amount||(12,300)|
|Capital gains tax:|
187,700 at 10%
Rita will not have a CGT liability for 2020–21 because her chargeable gain of £10,000 (270,000 – 260,000) is less than the annual exempt amount.
Election for holdover relief
Rita’s CGT liability for 2020–21 is:
|Held over again||200,000|
|Annual exempt amount||(12,300)|
|Capital gains tax:|
197,700 at 20%
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 2020, 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 2018 for £140,000. On 5 October 2020, 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 2020–21 is:
Holdover relief is restricted to £48,000 (60,000 x 120,000/150,000), being the proportion of chargeable business assets to chargeable assets.
Where an investment in company shares is concerned, business asset disposal relief is only available where an individual meets a 5% shareholding condition and is also an officer or employee of the company.
However, investors’ relief effectively extends relief to external investors in trading companies which are not listed (unlisted) on a stock exchange. With certain exceptions (such as being an unremunerated director) the investor must not be an employee or a director of the company whilst owning the shares.
There is no minimum shareholding requirement.
Investors’ relief has its own separate £10 million lifetime limit (compared to the business asset disposal relief lifetime limit of £1 million), with qualifying gains being taxed at a rate of 10%. To qualify for investors’ relief, shares must be:
On 20 June 2017, Winnie subscribed for 150,000 £1 ordinary shares (a 2% shareholding) in Unquote Ltd, an unquoted trading company, at their par value.
She has never been an employee or director of the company. Winnie sold the 150,000 shares in Unquote Ltd for £760,000 on 15 December 2020.
Winnie’s shareholding in Unquote Ltd does not qualify for business asset disposal relief because the 5% shareholding condition is not met and she was not an employee or director of the company. However, the conditions for investors’ relief are met, including the three-year holding period requirement.
Winnie’s CGT liability is:
|Shareholding in Unquote Ltd (760,000 – 150,000)||610,000|
|Annual exempt amount||(12,300)|
|Capital gains tax: 597,700 at 10%||59,770|
CGT planning for married couples has already been covered in part 1 of this article (see example 14).
Delay a disposal until the following tax year
Delaying a chargeable disposal that is going to be made towards the end of a tax year until the beginning of the next tax year, will postpone the resulting CGT liability by one year.
Zach is going to dispose of a shareholding on 5 April 2021.
If Zach makes the disposal on 5 April 2021 (tax year 2020–21), then the due date for the CGT liability will be 31 January 2022. If he postpones the disposal by one day until 6 April 2022 (tax year 2021–22), then the due date will be one year later – 31 January 2023.
Spread a disposal over two tax years
Spreading a disposal over two tax years will mean that two annual exempt amounts are available. For a basic rate taxpayer, more of the gain will be taxed at the lower rate of CGT. Such planning works particularly well with quoted shares since a disposal can easily be divided into two.
Juliet’s taxable income for the tax years 2020–21 and 2021–22 will be £24,000. During March 2021, she is going to dispose of 50,000 £1 ordinary shares in Great plc, and this will result in a chargeable gain of £2 per share.
Juliet will not make any other disposals during the tax years 2020–21 and 2021–22.
Based on the rates and allowances for the tax year 2020–21, Juliet should dispose of at least 12,900 shares in 2020–21 and postpone the disposal of at least 12,900 shares in Great plc until the tax year 2021–22. The resulting chargeable gain of £25,800 (12,900 x £2) will enable her annual exempt amount of £12,300 and unused basic rate tax band of £13,500 (37,500 – 24,000) for 2021–22 to be utilised. The CGT saving will be £3,810:
|Annual exempt amount |
12,300 at 20%
|Lower rate tax saving 13,500 at|
10% (20% – 10%)
Match chargeable gains and capital losses
If a chargeable gain has been made, then investments standing at a loss could be disposed of during the same tax year in order to create a capital loss. However, care needs to be taken so that the annual exempt amount is not wasted.
Som is a higher rate taxpayer and has already made a chargeable gain of £30,000 for the tax year 2020–21. She has 20,000 £1 ordinary shares in Worthless plc which are currently standing at a capital loss of £3.00 per share.
Som could dispose of 5,900 shares in Worthless plc before 5 April 2021. The resulting capital loss of £17,700 (5,900 x £3) will reduce her taxable gains to nil (30,000 – 17,700 – 12,300).
On 13 July 2020, Dear sold 1,000 of her 3,000 £1 ordinary shares in XYZ plc for £6,600. She died on 5 April 2021, 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 2013 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 2021 for £420,000. The factory was purchased on 24 October 1995 for £164,000, and was extended at a cost of £37,000 during March 2018.
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.
Indexation factors are:
|October 1995 to December 2017||0.856|
|October 1995 to February 2021||0.969|
|March 2018 to February 2021||0.060|
|Incidental costs of disposal||(6,200)|
|Cost (164,000 + 3,600)||(167,600)|
|Indexation allowance (167,600 x 0.856)||(143,466)|
There is no indexation allowance for the enhancement expenditure of £37,000 because this was incurred after December 2017.
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’s results are:
31 March 2021
31 March 2022
|Property business income||4,000||10,000|
The corporation tax liability of Even Ltd for the years ended 31 March 2021 and 2022 is:
31 March 2021
31 March 2022
|Property business income||4,000||10,000|
|Taxable total profits||60,000||70,000|
|Corporation tax at 19%||11,400||13,300|
For limited companies, disposals of shares are matched with purchases in the following order:
On 15 February 2021, Fair Ltd sold 70,000 £1 ordinary shares in Gong plc for £430,000. 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.
Indexation factors are:
|June 1995 to August 1999||0.105|
|August 1999 to December 2017||0.680|
|Purchase June 1995||40,000||110,000|
110,000 x 0.105
301,550 x 0.680
|Disposal February 2020|
|Balance carried forward||30,000||151,981|
Written by a member of the TX-UK examining team