This would mean the investor has a Section 104 holding of 9,500 shares with allowable expenditure of £15,333. This is calculated as the total share purchase costs of £16,000, less the reduction in allowable expenditure of £667 resulting from the previous partial withdrawal. This ignores any associated acquisition or disposal 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 after 6 April 2008. The example shows the effect of shares being sold to fund the previous partial withdrawal; the sale proceeds and number of shares sold are deducted from the Section 104 holding. This demonstrates that the Section 104 holding will effectively expand and contract over time, as shares are added and removed, and that the allowable expenditure for the shares in the Section 104 holding will also increase and decrease.
If the investor subsequently decides to sell a further 4,000 shares in January 2012, this requires the allowable expenditure of these shares to be calculated as a proportion of the total cost of the holding, as before, in order to calculate any gain or loss.
Section 104 holding of 9,500 shares with allowable expenditure of £15,333.
Sell 4,000 shares – there have been no further purchases.
4,000/9,500 = 42.1%.
42.1% of the allowable expenditure £15,333 for the shares included in the Section 104 holding at that date) = £6,455.
The shares are valued at £2.00 at the date of disposal, so £8,000 consideration is received.
£8,000 consideration minus £6,455 allowable expenditure = £1,545 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.