Capital gains tax: gains and losses on the disposal of shares and securities: formula sheet

Key formulas

Matching order for individuals

1. Same day 2. Next 30 days (earliest first) 3. Section 104 pool

Apply this order to every disposal. Match any part of a sale not covered by one rule to the next rule.

Section 104 pool cost on a sale

Cost of shares sold = Pool cost × Shares sold ÷ Shares in pool before the sale

Use the pool balance immediately before the sale. Deduct both the shares and the cost afterwards.

Gain on each matched slice

Gain = Proceeds for those shares − Allowable cost (including incidental costs)

If a sale is split across rules, apportion the proceeds by number of shares.

30-day window

Acquisitions on the day after the disposal up to 30 days after it

Same-day shares are matched first. Count the days carefully from the disposal date.

CGT payable

Taxable gain = Total gains − current-year losses − annual exempt amount (£3,000); then × 18% or 24%

Take the rates and the annual exempt amount from the tax tables. The rate depends on the unused basic rate band.

Bonus issue: pool adjustment

New number of shares = old number + bonus shares; pool cost unchanged

Bonus shares cost nil. Cost per share = unchanged total cost ÷ new total shares.

Rights issue: pool adjustment

New number of shares = old number + rights shares; new pool cost = old cost + (rights shares × issue price)

The amount paid is added to the pool cost. The shares are not a separate acquisition.

Disposal from the pool

Cost of shares sold = total pool cost × (shares sold ÷ shares in pool)

Gain = proceeds − allowable cost of shares sold, less incidental costs of sale.

Reorganisation with no cash

Cost of new shares = cost of old shares; no disposal at the date of exchange

Applies where the reorganisation conditions are met. The acquisition date of the old shares carries over.

CGT rates and annual exempt amount

Lower rate 18%; higher rate 24%; annual exempt amount £3,000

These come from the tax tables given in the exam. Business asset disposal relief is taxed at 14% on the first £1,000,000 lifetime limit.

Share-for-share rollover

New shares: cost and acquisition date = old shares' cost and date

No disposal at the takeover date. Gain is deferred until the new shares are sold.

Part cash consideration (ordinary shares and cash)

Cost allocated to cash = Total cost × cash ÷ (cash + market value of new shares)

Gain on the cash part is taxed now. Remaining cost carries forward on the new shares. Small-amount rule: under TCGA 1992 s122, cash that is small compared with the value of the holding is deducted from the cost of the new shares instead of being taxed as a part disposal. HMRC practice treats cash as small if it is £3,000 or less, or 5% or less of the value of the holding (cash plus market value of the new shares). These limits are practice, not in the tax tables, and the £3,000 is not the annual exempt amount. Use the part disposal formula when the cash is above both limits, unless the question tells you otherwise.

Loan notes that are QCBs

Gain frozen = market value of QCBs − cost apportioned to the QCBs (by market value)

Where the QCBs are the only consideration, the cost apportioned to them is the whole cost of the shares exchanged. With mixed consideration, apportion the cost between shares, QCBs and cash by market value first. The gain is chargeable when the QCBs are disposed of or redeemed, at the rates in force in the year of that disposal or redemption. Business asset disposal relief conditions are tested at the date of the original share disposal. The QCBs are themselves exempt from CGT when disposed of.

Loan notes that are not QCBs

Treated as part of the new holding: no disposal at takeover

The loan notes are rolled over with the new shares. The old cost is apportioned between the new shares and the loan notes by their market values at the date of the exchange. Each part keeps the old acquisition date.

CGT rates from the tax tables

18% lower rate, 24% higher rate, annual exempt amount £3,000

Business asset disposal relief rate is 14% on a lifetime limit of £1,000,000. Investors' relief has the same rate and limit.

Taxable gains

Total gains − current-year losses − AEA (£3,000)

The AEA is wasted if you do not use it. Current-year losses are set off in full, even if this wastes the AEA.

CGT rates

Lower rate 18%; higher rate 24%

The lower rate applies only to gains falling within any unused basic rate band after taxable income.

BADR rate

14% on qualifying gains up to £1,000,000 lifetime

Take the rate and limit from the tax tables. Gains above the lifetime limit are taxed at 18% or 24%.

BADR personal company test (shares)

≥ 5% ordinary shares and ≥ 5% voting rights, trading company, officer or employee, all for 2 years before disposal

All conditions must be met throughout the whole two-year period.

Order of using bands and AEA

BADR gains use the basic rate band first; AEA is set against 24% gains first, then 18%, then 14%

This gives the lowest tax in the exam.

Remaining lifetime limit

£1,000,000 − BADR gains already claimed

Earlier claims reduce the amount of the limit available now.

Quick revision

• Matching order for individuals: same day, next 30 days, then the Section 104 pool.
• The pool holds the number of shares and the total cost. Add purchases, deduct part of the cost on a disposal.
• A bonus issue adds shares to the pool at nil cost.
• A rights issue adds shares and the cash paid to the pool.
• In a share-for-share exchange, the gain is usually rolled into the new shares and the old cost carries over.
• Cash received in a takeover can trigger a part-disposal, so check for it.
• CGT rates for individuals are 18% and 24%. The annual exempt amount is £3,000. Set it against gains taxed at the highest rate first: 24%, then 18%, then 14%.
• Business asset disposal relief and investors' relief both give a 14% rate, each with a £1,000,000 lifetime limit. Qualifying gains are taxed first and use up any remaining basic rate band.
• Business asset disposal relief and investors' relief each have their own conditions. Check them in the scenario.
• Stamp duty on shares is 0.5% of the consideration and is paid by the purchaser. A gift for no consideration carries no stamp duty. Electronic transfers attract stamp duty reserve tax instead of stamp duty.
• Gift relief can defer a gain on a gift of qualifying business assets. Check that the shares qualify.
• State your assumptions and give a clear recommendation.

Common mistakes

• Putting shares bought on the same day or within 30 days into the Section 104 pool. Fix: Check the dates first. Shares matched under same-day or 30-day rules use their own cost and stay out of the pool.
• Including purchases made after the sale (beyond 30 days) in the pool for that sale. Fix: The pool for a disposal only contains shares acquired before the disposal date. Later purchases go into the pool for later sales.
• Treating a bonus issue as a separate purchase at market value. Fix: Bonus shares are free. Add the shares only. Total pool cost does not change.
• Forgetting to add the rights issue money to the pool cost. Fix: Add both the shares and the cash paid. Check that pool cost rises by shares × issue price.
• Taxing the whole gain when only shares are received Fix: Check for new ordinary shares only. If there is no cash, there is no disposal and the cost and date are carried over.
• Taxing the loan notes as if they were exempt now Fix: QCBs are exempt on their own disposal, but the gain on the old shares is calculated at takeover and charged when the QCBs are disposed of.
• Treating BADR as an exemption or a reduction in the gain. Fix: BADR only changes the rate to 14% on qualifying gains. The gain stays in the computation.
• Missing the two-year period or one of the 5% tests. Fix: Tick off each condition separately, with its dates, before you compute any tax.

Exam tips

• Write out the dates of every purchase and sale first. Most marks are lost because a same-day or 30-day purchase was missed.
• Show the pool as a table with shares and cost columns. Markers can give follow-through marks if you slip.
• State the matching rule next to each slice, for example same day or 30 days. This earns marks for method.
• In a Section A scenario, link the gain to the client's rate of tax and any losses. Use the tax tables for the rates and the annual exempt amount.
• If a client plans a sale, mention the 30-day rule and warn about buying back shares too soon, as a professional skills point.
• Draw the pool table first, even for a short requirement. Marks are given for the working, not just the final gain.
• State clearly that bonus and rights issues are not disposals and that the shares are added to the existing pool. This is an easy mark.
• Check the dates for same-day and 30-day matching before you use the pool. Examiners often place a purchase just after a sale.