When disposing of an unwrapped OEIC or unit trust holding, for many clients a key consideration is whether the disposal creates a gain or loss for capital gains tax (CGT) purposes. The calculation is relatively straightforward if the client holds the same number of shares or units that were originally purchased. However, the situation is more complex if further shares have been added to the investment holding or removed during the period the funds have been held by the client. This could occur if, for example, dividends were reinvested in the fund, or shares were encashed to pay for charges or regular withdrawals.

Because it is not possible to identify individual shares added or removed to a holding over time, a separate process is required to calculate the purchase price of these shares or units in order to calculate the gain or loss.

The first stage is to identify any shares sold and repurchased within 30 days of each other – these will be caught by the CGT ‘bed and breakfast rules’ and are not included in the calculation. Once this area has been addressed the next stage is to consider the remaining identical shares in the investment holding that have been bought at different times.

Prior to April 2008, where the same shares had been bought at different times, the CGT calculations were based on the ‘last in first out’ principle and each tranche of shares being sold was treated as a separate asset.

However, since 2008, the calculation has changed. Identical shares in an investment holding that have been bought at different times are now treated as a single asset, known as a Section 104 holding, and when the holding is sold, the aggregate purchase price is used to calculate any gains or losses.

The following example shows how the acquisition price of a Section 104 holding is calculated. Consider that an investor has purchased 10,000 shares in XYZ Company at different times over the last 10 years and has also taken a partial withdrawal:

This would mean the investor has a Section 104 holding of 9,500 shares with a total purchase price of £15,125 (ignoring associated acquisition costs, visit knowledgedirect/CGT for a full disposal explanation). The cost is the actual cost and not any ‘indexed’ cost as this does not apply to disposals post 6 April 2008. The example shows the effect of shares being sold to fund the partial withdrawal; the sale proceeds and number of shares sold are deducted from the Section104 holding. This demonstrates that the Section104 holding will effectively expand and contract over time, as shares are added and removed.

If the investor decides to sell 4,000 shares in January 2011, this requires the purchase price of these shares to be calculated, as a proportion of the total cost of the holding, in order to work out any gain or loss.

Section 104 holding of 9,500 shares with a cost of £15,125.
Sell 4,000 shares – there have been no further purchases.
4,000/9,500 = 42.1%.
42.1% of holding of £15,125 (total cost of holding)
= £6,368.

The shares are valued at £2.00 at disposal, so £8,000 consideration is received.

£8,000 minus £6,368 = £1,632 gain.

Under the pre-2008 method, there would have been no gain, (the last 4,000 shares purchased at £2.00 per share would have been matched to the 4,000 shares sold) so the impact of the Section 104 holding is to bring forward gains that would otherwise be realised when the entire holding is sold.

It is worth considering that this methodology applies to all holdings. If a client held the same unit trusts or OEICs directly as well as on a platform then the client’s total holding would constitute a single Section 104 holding. (Life and Pension funds are not included in this calculation.)

Income and distribution units

As noted above, additional units or shares purchased by reinvested distributions from income funds are simply treated as additions to the Section 104 holding.

However, where notional distributions arising from accumulation units are subject to income tax, the net amount of these distributions (ignoring tax credits and any equalisation) is deducted from the sale proceeds. This has the effect of avoiding any potential double taxation on accumulation units (ie income tax on the notional distributions, plus CGT on the increase in the share price attributable to the reinvested income) by reducing the consideration on sale.