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My client purchased 10,000 shares in a developing hi-tech company on 1 September 1999. The cost of the shares amounted to £10,000. On 24 May 2000, my client disposed of the entire shareholding, with net proceeds amounting to £90,000. On the strength of that particular transaction, a capital gain of £80,000 arose and, with neither indexation nor taper relief available, the entire gain is taxable at the rate of 40 per cent with a corresponding liability falling due on 31 January 2002.
My client purchased 10,000 shares in a developing hi-tech company on 1 September 1999. The cost of the shares amounted to £10,000. On 24 May 2000, my client disposed of the entire shareholding, with net proceeds amounting to £90,000. On the strength of that particular transaction, a capital gain of £80,000 arose and, with neither indexation nor taper relief available, the entire gain is taxable at the rate of 40 per cent with a corresponding liability falling due on 31 January 2002.
Curiously, on 7 June 2000 (two weeks following the previous disposal), my client re-purchased 3,000 shares in the same hi-tech company at a cost of £12 per share. Accordingly, as a result of the fact that the purchase was made within 30 days of the disposal, am I correct in assuming that the revised capital gains tax computation in respect of the sale on 24 May 2000 should be as follows?:
£ £
Net proceeds of
10,000 shares sold 90,000
Acquisition within
30 days (3,000) 36,000
Previous acquisition
(7,000) 7,000 43,000
47,000
My client approached me in the first place in order to establish how he may mitigate the potential capital gains tax charge. Personal pensions and venture capital trusts have been considered. However, is it fair to assume that a measure of tax planning can still be brought into play by re-purchasing a shareholding within thirty days of disposal — all facts considered?
(Query T15,674) Hopeful.
Answers:
'Hopeful' should not be surprised by the result he has put forward. It is indeed correct. The legislation regarding share identification is very clear. Following a sale of shares, if any are repurchased within 30 days then the shares sold get identified first with the shares repurchased. That is the whole basis of the anti-'bed-and-breakfast' legislation, ordinarily to stop the shares sold being identified with the original acquisition. In the circumstances laid out by 'Hopeful', the result may not have been envisaged by the legislators, but nevertheless the legislation is very clear.
There is one further point. Technically there are two disposals and not one. The one relating to the 3,000 shares repurchased will show:
Net proceeds of 3,000 shares sold £27,000
Acquisition within 30 days £36,000
£-9,000
Net proceeds of 7,000 shares sold £63,000
Previous acquisition cost £7,000
£56,000
The overall result, £47,000, is of course the same but on the SA108 tax return form two lines will be needed rather than just one. — ITC.
'Hopeful's capital gains tax computation is indeed correct. The new rules for share identification were brought in effectively to eliminate 'bed and breakfast' transactions although this clearly was not 'Hopeful's' client's intention.
Following the acquisition on 7 June 2000, the client has net cash (after provision for taxation) of £35,200:
Proceeds of original shares 90,000
Cost of new shares (36,000)
Tax on £47,000 gain (at say 40 per cent) (18,800)
Net cash £35,200
In addition, the client holds 3,000 shares in the company.
If the client had sold fewer shares originally, then the scenario could have been as follows:
Proceeds of 6,069 shares 54,620
Tax on £54,260-£5,709(cost) at 40 per cent (19,420)
Net cash £35,200
In addition, however, the client holds 3,931 shares in the company. In conclusion the client now holds 931 less shares than he/she may have done. --TC/AC
