Identifying the cost of your shares
You bought further shares in a company two years ago which are now worth much less. The new Capital Gains Tax rules mean that you may not be able to use the loss to reduce any gains you have. How can you rescue the situation?
Background
Major changes were introduced to the Capital Gains Tax (CGT) regime on April 6 2008. One of these is that since then all shares in the same company and of the same type, owned by the same person in the same capacity, are treated as a single asset. This is known as “pooling” and could radically affect the base cost of your shares and thus the CGT you could pay when you sell them. So how can you reduce the effect of the new rules?
Are all shares pooled?
If you own ordinary shares in a company, and some have voting rights and others do not, then for CGT purposes they will not be grouped together as a single asset because they are not identical. Also, if you own shares personally but hold other identical ones on behalf of someone else, e.g. your child, then again they will not be pooled.
Tip. You can avoid new purchases of shares being pooled with existing ones by buying them as a gift for your spouse or child. Even if legally the shares are in your name, provided your spouse or child is entitled to the income and proceeds of sale from the shares, then they will not be treated as yours for CGT purposes.
Trap. If you gift shares to your child, you still have to declare any dividends etc. from the shares as yours until they reach 18 years old or marry if below that age.
Old rules
Example. If you bought, say, 10,000 ordinary shares in Aggregate Ltd in 1997 at a cost of £1 each and following the company’s success bought a further 2,000 at a cost of £7 each in 2007, the purchases would have been treated as two separate assets for CGT purposes under the rules that applied up to April 5 2008.
Thus if you had sold 2,000 shares in Aggregate Ltd for £12,000, these would have been matched with the 2,000 most recently bought, i.e. those you bought for £7 each. You would have made a loss on the deal of £2,000, i.e. the shares cost £14,000 less sale proceeds of £12,000.
New rules
Under the post-April 5 2008 rules, all the shares you bought in Aggregate Ltd would be grouped together, i.e. a total of 12,000 shares at a cost of £24,000. The base cost for CGT purposes would be £2 per share.
So, if in the example above you instead sold 2,000 shares on April 30 2008, this would produce a gain of £8,000, i.e. sale proceeds £12,000 less base cost of £2 per share = £4,000, compared with the loss of £2,000 if you had sold the shares a month earlier.
Solutions?
Whilst the new pooling rules cannot be avoided, you can mitigate the effects by making efficient use of exemptions and inter-spouse transfers.
Tip. If you have used your CGT annual exemption but your spouse hasn’t, transfer some shares to them. Transfers between spouses are treated as being made at base cost, so there is no gain and thus no CGT for you on the transfer. If your spouse then sells the shares for more than the base cost, they can set their exemption against the gain.
Create your profile to unlock this advice and many more.