ATXP6 UK
Syllabus A4. Corporation Tax A4a. Chargeable gains for companies

A4a. Disposals of shares by companies, with share identification rules

Syllabus A4a)

E3 Chargeable gains for companies

Matching rules

Matching rules

Disposals of shares for individuals and for companies are extremely similar. 

There are 2 differences, these are that we index the cost of the shares and when looking at shares to be sold, and we do not look 30 days after the sale, we look 9 days previous to the sale.

  • There is no other difference between the two. 

    For this reason, the same illustrations and quizzes have been used to explain this are so that you can compare for yourself both applications.

  • When shares are disposed of, a problem arises in finding their allowable cost, if the shares were acquired over a long period of time.

  • To make this simpler, HMRC uses a set of rules to determine the acquisition date and cost of the shares being disposed of. 

    These rules are called the matching rules.

Disposals of shares are matched with acquisitions in the following order:

  1. Shares acquired on the same day of disposal.

  2. Shares acquired within 9 days before disposal date (there is no indexation calculation required for this match).

  3. Shares from the share pool.

This would be much easier to understand if we did an example!

Illustration:

Benazir owns shares in L plc. 

She acquired 1,500 shares in the company on 31/05/2015 for £20,000, and 500 shares on 30/06/2016 for £10,000.

On 21/02/2019 Benazir bought a further 200 shares in L plc. For £4,000.

  • Benazir sold 1,000 shares in L. plc for £25,000 on 28/02/2019.

  • Calculate Benazir’s capital gain on the disposal of the shares in February 2019.

  • Indexation factors:

    To June 2016 £356
    To December 2017 £1,731

Solution:

We need to dispose of 1,000 shares. 

Let us apply our matching rules to see which shares we are disposing of.

Note you do not round indexation in the share pool.

FIRST MATCH – same day acquisition SECOND MATCH – 9 days previous to disposal acquisition THIRD MATCH – share pool 
None. 21/02/2019 – 200 shares for £4,000. 800 shares needed from share pool.

Share pool:

Share pool
Description Number Cost Indexed Cost
31/03/2015 Purchase 1,500 £20,000 £20,000
Indexing to June 2016 £356
Indexed cost of March 15 purchase £20,356
30/06/2016 Purchase 500 £10,000 £10,000
Total £30,356
Index to Dec 17 £1,731
Total 2,000 £30,000 £32,087
Disposal from share pool (800) (800/2000)*£30,000 = (£12,000) (800/2000)*£32,087 = (£12,835)
Remaining in share pool 1,200 shares £18,000 £19,252

Specially note

how each purchase will be indexed to the next EVENT date (an event being either a purchase, sale or rights issue)

Calculating capital gain:

Disposal proceeds £25,000

Acquisition cost:

07/03/19  (£4,000)

Share pool (£12,835)

Capital gain £8,165

  • Note the share pool figure in the above calculation is the indexed cost figure. This could be shown separately as cost £12,000 and indexation (£12,835-£12,000) £835. This is useful to be aware of because indexation cannot create or increase a loss so if the proceeds had been £11,000 and the cost £12,000 there would have been an allowable loss of £1,000. But if you had not separated out the cost and indexation you would have calculated a loss of (11,000 - 12,835) £1,835 which would have been incorrect.

    You also might want to try to draw a timeline to ensure that you do not miss any acquisition dates!

  • From this illustration, you have learnt how to index shares. 

    Shares issued through a bonus issue will not be indexed as no money has been paid for them. 

    It will be assumed as though they have been acquired on the last purchase date. 

    Shares that have been issued via a rights issue will be indexed as normal, as money has been paid for them.