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    home | Shares/Stocks | How new new CGT matching rules apply . . .
     

    How new new CGT matching rules apply for investors after April 2008

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    The 2008 capital gains tax legislation has introduced changes to the share identification rules for individuals as from April 2008.

    These changes will impact any medium or long term share investors as they will be used to determine which shares your disposals will be matched with for capital gains tax purposes.

    When you sell shares, in order to calculate the capital gain, you need to be able to calculate a 'base cost' for those shares. This base cost will be deducted from the proceeds to work out the capital gain.

    Under the pre 2008 rules there are a number of rules that apply for shares acquired at different times.

    There is a definite order in which acquisitions should be considered. When you sell shares you would look at your holding of those particular shares and match the disposals with:

  • shares acquired on the date of disposal;
  • shares acquired in the 30 days following the date of disposal ;
  • assets acquired between 6 April 1998 and the date of disposal, on a "last in, first out" basis;
  • assets acquired between 1 April 1982 and 5 April 1998 (these assets are treated as a single asset, known as a "1985 pool";
  • assets acquired between 7 April 1965 and 31 March 1982 (also treated as a single assets, a "1982 pool"); and
  • assets held at 6 April 1965, on a last in, first out basis.

    The 1985 and 1982 pools grouped all the share acquisitions together, whereas shares acquired after that are considered according to each individual acquisition.

    The reason for these various different rules was partly because they've evolved haphazardly and have had to accommodate the withdrawal of indexation relief after April 1998 as well as the introduction of taper relief.

    However the new changes to the general capital gains tax regime from April 2008 and the withdrawal of taper relief and indexation relief mean that it's not necessary to have all these separate rules.

    So, from April 2008 the share identification rules will be made much simpler and a new pool will include most shares acquired before the date of disposal.

    They've therefore simply changed the order of matching when you sell shares so that they'll be matched with: 1) assets acquired on the date of disposal; 2) assets acquired in the 30 days following the date of disposal; and 3) assets in a new pool .

    The first two matching rules are the same as under the pre 2008 rules (The next 30 day matching rule is to prevent the bed and breakfasting of shares).

    The big difference is the new pool.

    The new pool

    The new pool means that all purchases are treated as a single pool, growing or diminishing as shares are acquired and disposed of. The allowable cost on a disposal will therefore represent a pro rating of the total costs of all the shares.

    Before the changes, the 1985 pool operated in this way but it could not contain shares acquired before 6 April 1982 or after 5 April 1998. The new pool has now been widened to include all shares except for those acquired on the same day or in the next 30 days of disposal.

    This will lead to a different base cost for CGT purposes than the old rules as essentially you are using an average cost base.

    Example

    Bert acquired shares in X plc as follows:

    15 May 2000 5000 £10,000
    27 June 2006 10000 £25,000
    9 September 2007 10000 £30000

    He then sold 15,000 shares for £60,000.

    Under the pre April 2008 rules his disposal would be matched as follows:

  • 10,000 in September 2007 (£30,000)
  • 5,000 in June 2006 (£12,500)

    The total base cost would be £42,500.

    Under the new rules the pool would contain all of the shares as follows:

    Number of shares 15,000
    Cost £65,000

    On a disposal of 15,000 shares the base cost would be £39,000 (ie 65,000/25,000*£15,000)

    This is a much simpler method of calculating gains and means that investors will simply add the cost of shares including any incidental costs such as stamp duty etc to the pool for calculating gains.


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