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Capital Gains Tax

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09/11/2012

Section 104 holdings – Share identification rules

When considering disposing of assets, you need to be aware of the clients complete fund holdings rather than just the holding they may wish to sell. Holding a fund direct as well as via a collective such as Skandia's Collective Investment Account may mean the gain or loss realised is more or less than expected. Although the introduction of Section 104 holdings simplified the old rules it does have the impact of dragging older gains into charge quicker.

When disposing of an unwrapped Open Ended Investment Company (OEIC) or unit trust holding a key consideration for many clients 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:

Date purchased/sold No. of shares Share price  Total allowable expenditure
01.05.2000 2,000 £1.00 £2,000
07.08.2002 4,000 £1.50  £6,000
06.05.2008 (sale) - 500 £1.75 - £667*
09.08.2008 4,000 £2.00 £8,000
Totals  9,500   £15,333

 

* The partial surrender on 06.05.2008 was from a Section 104 holding of 6,000 shares with a total cost / allowable expenditure on that date of £8,000.
The portion of that holding sold was 500/6,000 = 8.33%.
Allowable expenditure for the shares sold was therefore 8.33% of £8,000 = £667.

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.

This article is based on Skandia’s interpretation of the law and HM Revenue & Customs practice as at November 2012. We believe this interpretation is correct, but cannot guarantee it. Tax relief and the tax treatment of investment funds may change.

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