29 November 2000
LIFO or FIFO
A client held 2,500 ordinary shares in a trading company. The company applied for enterprise investment scheme status in January 1999 and this was subsequently granted by the local tax district. On 10 April 1999 our client subscribed for 6,500 ordinary £1 shares at a total cost of £75,000, allowing him to defer a chargeable gain by way of reinvestment.
Subsequent to this, our client purchased a further 500 ordinary £1 shares from another shareholder in July 1999.
A client held 2,500 ordinary shares in a trading company. The company applied for enterprise investment scheme status in January 1999 and this was subsequently granted by the local tax district. On 10 April 1999 our client subscribed for 6,500 ordinary £1 shares at a total cost of £75,000, allowing him to defer a chargeable gain by way of reinvestment.
Subsequent to this, our client purchased a further 500 ordinary £1 shares from another shareholder in July 1999.
LIFO or FIFO
A client held 2,500 ordinary shares in a trading company. The company applied for enterprise investment scheme status in January 1999 and this was subsequently granted by the local tax district. On 10 April 1999 our client subscribed for 6,500 ordinary £1 shares at a total cost of £75,000, allowing him to defer a chargeable gain by way of reinvestment.
Subsequent to this, our client purchased a further 500 ordinary £1 shares from another shareholder in July 1999.
Our client has now received an offer for part of his shareholdings and we need to be able to identify on what basis we match the proposed disposal with the original acquisitions disposal. The normal share identification rules would indicate a last in first out basis. The enterprise investment scheme legislation states that the normal pooling arrangements for shares acquired before 6 April 1998 are not applied and the identification rules for disposals on or after that date are dealt with on a first in first out basis.
Can readers clarify the share identification rules for the disposal at the current time of either:
(a) 600 shares
(b) 2,600 shares
(c) 3,100 shares?
(Query T15,716) — TAS.
Answers:
It is assumed that the proposed disposal will be profitable and that income tax relief was obtained in April 1999 on the subscription for 6,500 shares.
The gain that would accrue on a disposal within five years is considered in paragraph 4 of Schedule 5B to the Taxation of Chargeable Gains Act 1992. The first in first out rule is applied except where there were mixed acquisitions on a single day.
Hence the 2,500 shares acquired before 10 April 1999 represent the prime source of disposal, related to the 600 shares in point (a) or to 2,500 out of the 2,600 shares in point (b).
The remaining 100 shares in point (b) would be related to the acquisition of 6,500 shares on 10 April 1999. As regards point (c), the 2,500 shares originally held are first identified, leaving 600 shares to be identified with the acquisition on 10 April 1999.
Taper relief would in each case be due as for business assets from 6 April 2000 but as for non-business assets otherwise, by apportionment (see 'Tapering Through' by Andrew Hubbard in Taxation, 13 April 2000 at pages 42 and 43). The Inland Revenue booklet IR137 offers various examples, some relevant if the client makes further qualifying investments.
Retention until (after) 10 April 2004 would provide exemption for the gain attributable to the period since 10 April 1999 on the shares with deferred gains subscribed for at that date. — M.C.N.
Any relief under the enterprise investment scheme requires a subscription for new shares in a company, and thus in this case the 2,500 shares originally held plus the further 500 shares acquired in July 1999 are acquisitions not qualifying for any relief. Only the acquisition on 10 April 1999 (6,500 shares) qualifies for enterprise investment scheme relief.
So this gives a pattern of a first acquisition not qualifying for relief, a second acquisition which does so qualify, and a final acquisition which does not.
The normal capital gains tax rule is that disposals are matched on a last in first out basis. However, paragraph 4(3) of Schedule 5B to the Taxation of Chargeable Gains Act 1992 displaces this rule in relation to enterprise investment scheme shares. Rather strangely for a matter relating to the enterprise investment scheme, the paragraph 4(3) rule is designed to be kind to the investor. He or she is treated as disposing of shares on a first in first out basis, thus maximising the hope that the disposal is outside the period for any clawback of relief.
Subparagraph 4B of paragraph 4 to Schedule 5B states that the normal capital gains tax matching rules for disposals of securities have effect subject to the previous provisions of paragraph 4, and subparagraph 4C states that those normal matching rules do not apply to shares to which capital gains tax deferral relief alone is attributable (therefore leading one to assume that those sections do continue to apply to all shares to which deferral relief is not attributable).
What then are we to make of all these contradictions? Last in first out is the normal rule for shares not qualifying for deferral relief, but this is displaced by a first in first out rule, with a contradictory remark suggesting that last in first out still applies to shares to which no deferral relief is attributable, with all the confusion compounded many times over by either a printing error, or a straightforward mistake, in paragraph 62920 of the Revenue's Capital Gains Tax Manual which sets out to explain the rules with a practical example.
The better view seems to be that as soon as a person acquires any shares in a company which qualify for enterprise investment scheme relief, all his or her disposals of shares in that company are then identified on a first in first out basis.
This seems a little extraordinary given that there could be dozens of acquisitions not qualifying for the relief and only one small acquisition which does so qualify, but this seems to be the accepted interpretation of paragraph 4 of Schedule 5B and, after correcting the clear error, referred to above, in paragraph 62920 of the Revenue's manual, this seems to be what it says.
The client of 'TAS' must therefore match disposals on a first in first out basis, disregarding whether they are shares which qualified for enterprise investment scheme relief or not. — Big Shot.
Editorial note. It should be noted that, assuming first in first out, on occasion (b) 100 shares and on occasion (c) 600 shares will suffer 'clawback' of the original income tax relief granted on enterprise investment scheme investment on 10 April 1999, assuming disposal takes place before 10 April 2004.
A client held 2,500 ordinary shares in a trading company. The company applied for enterprise investment scheme status in January 1999 and this was subsequently granted by the local tax district. On 10 April 1999 our client subscribed for 6,500 ordinary £1 shares at a total cost of £75,000, allowing him to defer a chargeable gain by way of reinvestment.
Subsequent to this, our client purchased a further 500 ordinary £1 shares from another shareholder in July 1999.
Our client has now received an offer for part of his shareholdings and we need to be able to identify on what basis we match the proposed disposal with the original acquisitions disposal. The normal share identification rules would indicate a last in first out basis. The enterprise investment scheme legislation states that the normal pooling arrangements for shares acquired before 6 April 1998 are not applied and the identification rules for disposals on or after that date are dealt with on a first in first out basis.
Can readers clarify the share identification rules for the disposal at the current time of either:
(a) 600 shares
(b) 2,600 shares
(c) 3,100 shares?
(Query T15,716) — TAS.
Answers:
It is assumed that the proposed disposal will be profitable and that income tax relief was obtained in April 1999 on the subscription for 6,500 shares.
The gain that would accrue on a disposal within five years is considered in paragraph 4 of Schedule 5B to the Taxation of Chargeable Gains Act 1992. The first in first out rule is applied except where there were mixed acquisitions on a single day.
Hence the 2,500 shares acquired before 10 April 1999 represent the prime source of disposal, related to the 600 shares in point (a) or to 2,500 out of the 2,600 shares in point (b).
The remaining 100 shares in point (b) would be related to the acquisition of 6,500 shares on 10 April 1999. As regards point (c), the 2,500 shares originally held are first identified, leaving 600 shares to be identified with the acquisition on 10 April 1999.
Taper relief would in each case be due as for business assets from 6 April 2000 but as for non-business assets otherwise, by apportionment (see 'Tapering Through' by Andrew Hubbard in Taxation, 13 April 2000 at pages 42 and 43). The Inland Revenue booklet IR137 offers various examples, some relevant if the client makes further qualifying investments.
Retention until (after) 10 April 2004 would provide exemption for the gain attributable to the period since 10 April 1999 on the shares with deferred gains subscribed for at that date. — M.C.N.
Any relief under the enterprise investment scheme requires a subscription for new shares in a company, and thus in this case the 2,500 shares originally held plus the further 500 shares acquired in July 1999 are acquisitions not qualifying for any relief. Only the acquisition on 10 April 1999 (6,500 shares) qualifies for enterprise investment scheme relief.
So this gives a pattern of a first acquisition not qualifying for relief, a second acquisition which does so qualify, and a final acquisition which does not.
The normal capital gains tax rule is that disposals are matched on a last in first out basis. However, paragraph 4(3) of Schedule 5B to the Taxation of Chargeable Gains Act 1992 displaces this rule in relation to enterprise investment scheme shares. Rather strangely for a matter relating to the enterprise investment scheme, the paragraph 4(3) rule is designed to be kind to the investor. He or she is treated as disposing of shares on a first in first out basis, thus maximising the hope that the disposal is outside the period for any clawback of relief.
Subparagraph 4B of paragraph 4 to Schedule 5B states that the normal capital gains tax matching rules for disposals of securities have effect subject to the previous provisions of paragraph 4, and subparagraph 4C states that those normal matching rules do not apply to shares to which capital gains tax deferral relief alone is attributable (therefore leading one to assume that those sections do continue to apply to all shares to which deferral relief is not attributable).
What then are we to make of all these contradictions? Last in first out is the normal rule for shares not qualifying for deferral relief, but this is displaced by a first in first out rule, with a contradictory remark suggesting that last in first out still applies to shares to which no deferral relief is attributable, with all the confusion compounded many times over by either a printing error, or a straightforward mistake, in paragraph 62920 of the Revenue's Capital Gains Tax Manual which sets out to explain the rules with a practical example.
The better view seems to be that as soon as a person acquires any shares in a company which qualify for enterprise investment scheme relief, all his or her disposals of shares in that company are then identified on a first in first out basis.
This seems a little extraordinary given that there could be dozens of acquisitions not qualifying for the relief and only one small acquisition which does so qualify, but this seems to be the accepted interpretation of paragraph 4 of Schedule 5B and, after correcting the clear error, referred to above, in paragraph 62920 of the Revenue's manual, this seems to be what it says.
The client of 'TAS' must therefore match disposals on a first in first out basis, disregarding whether they are shares which qualified for enterprise investment scheme relief or not. — Big Shot.
Editorial note. It should be noted that, assuming first in first out, on occasion (b) 100 shares and on occasion (c) 600 shares will suffer 'clawback' of the original income tax relief granted on enterprise investment scheme investment on 10 April 1999, assuming disposal takes place before 10 April 2004.
