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13 December 2000
Simple tax?
I should be grateful if readers could consider the following share history :
50,000 shares
bought 8.11.99 £6,310
50,000 shares
sold 11.11.99 £5,600
50,000 shares
bought 1.12.99 £11,835
20,000 shares
sold 6.12.99 £6,675
5,555 shares acquired
under a 1:9 rights issue
9.12.99 cost £444 (by virtue
of 50,000 held on 1.12.99)
I should be grateful if readers could consider the following share history :
50,000 shares
bought 8.11.99 £6,310
50,000 shares
sold 11.11.99 £5,600
50,000 shares
bought 1.12.99 £11,835
20,000 shares
sold 6.12.99 £6,675
5,555 shares acquired
under a 1:9 rights issue
9.12.99 cost £444 (by virtue
of 50,000 held on 1.12.99)
Simple tax?
I should be grateful if readers could consider the following share history :
50,000 shares
bought 8.11.99 £6,310
50,000 shares
sold 11.11.99 £5,600
50,000 shares
bought 1.12.99 £11,835
20,000 shares
sold 6.12.99 £6,675
5,555 shares acquired
under a 1:9 rights issue
9.12.99 cost £444 (by virtue
of 50,000 held on 1.12.99)
Under the share identification rules, the disposal on 11 November 1999 is matched with the acquisition on 1 December 1999 (being an acquisition within 30 days of a disposal), giving a net loss of £6,235. However, the rights issue is treated as being acquired on the same date as the shares from which it arose, in this case the acquisition on 1 December 1999.
As the 1 December 1999 acquisition has already been matched when the rights issue takes effect, should the new 5,555 shares be treated as a separate asset, as the original shares to which they would normally be added are theoretically no longer in existence? Therefore, it would appear that the subsequent disposal on 6 December 1999 should first be matched with the rights issue (5,555 shares), with the balance (14,445) being taken from the shares bought on 8 November 1999.
Or should the disposal on 11 November 1999 be matched with 50,000 of a combined 55,555 treated as purchased on 1 December 1999? The subsequent disposal on 6 December 1999 is then matched with the remaining 5,555 with the balance coming from the shares bought on 8 November 1999.
Is there not a danger of re-writing history if the latter is correct? If the rights issue was made on, say, 6 June 2000, based on holdings on, say, 2 December 1999, the 1999-2000 tax return would have to be amended as the amount and cost of shares acquired on 1 December 1999 will have now changed.
I should be grateful for advice on the correct treatment.
(Query T15,725) — Lighten our Darkness.
The best answer is given on the Revenue Help Sheet IR285 (Share reorganisations, company takeovers and capital gains tax), which states in summary:
* The issue of any new shares (resulting from a share reorganisation) is not treated as an acquisition.
* The loss or alteration of any old shares is not treated as a disposal.
* Because you are not treated as acquiring the new shares, the same day rule and the 'bed and breakfasting' rule do not apply.
From the above, given that the acquisition of shares on 1 December 1999 and the rights on 9 December 1999 are treated as a single asset acquired on 1 December, the inference is that only the original 50,000 qualify for 30-day matching and the 'rights' shares will be treated as being matched on a last in first out basis, as though they were acquired on 1 December. This treatment avoids any worry in relation to the adjustment to future tax returns following subsequent rights issues which would be required if the querist's suggested treatment were correct; in the example given by the querist (more rights in June 2000) it would be easy to amend the 1999-2000 return but if, say, four or five rights issues were made in respect of an original post 6 April 1998 holding over a number of years, each time there was a sale following a rights issue a number of tax returns would need to be amended as the base costs of all disposals of a holding forming part of the original acquisition would have been changed.
I consider the calculation to be as follows:
Date of Transaction No of Shares Cost
8.11.99 - purchase 5,000 6,310
6.12.99 - sale (20,000) (2,524)
8.11.99 - base date
carried forward 30,000 3,786
1.12.99 — purchase 50,000 11,835
11.11.99 — sale (50,000) (11,835)
1.12.99 — rights 5,555 444
1.12.99 — base date
carried forward 5,555 444
Note that if the sale on 6 December had occurred on the 9th or later, the 5,555 'rights' shares would have been matched against part of this on the last in first out basis.
If there were further rights issues, values of each attributable holding will be adjusted when part of a disposal is matched against it, with the balance carried forward offset against subsequent disposals e.g.
8.11.99 carried forward 30,000 3,786
1.6.00 rights 1:2 at £1 15,000 15,000
1.8.00 sale (15,000) (9,393)
carried forward base
8.11.99 30,000 9,393
Note that for taper relief purposes, the rights qualify with effect from the date of the original acquisition.
- Bartholomew.
The situation is that identified as a reorganisation by sections 126 and 127, Taxation of Chargeable Gains Act 1992. These provide that a rights issue of shares is to be combined with the original holding so as to create a single asset which is to be 'treated as the same asset acquired as the original shares were acquired'. See also the examples appearing in the article 'Identification Crisis' by Keith Gordon in Taxation, 24 August 2000, at pages 536 to 540.
It is considered that the rights issue has to be attached to the acquisition on 1 December 1999 with the practical outcome that all the costs of that acquisition require to be matched with the disposal on 11 November 1999.
It has been asserted that there was a net loss of £6,235 (£11,835 minus £5,600) but this should be calculated otherwise if the disposals are drawn indifferently from original shares and rights.
Section 105(1), Taxation of Chargeable Gains Act 1992 treats both the rights and the original shares as having been acquired by a single transaction. In other words, the costs of all acquisitions on the same day are pooled and then allocated so as to provide a unit price for the 55,555 shares within a 1 December 1999 dateline. Dividing £12,279 (£11,835 plus £444) by 55,555 yields a price of 22.1024 pence per share. As 50,000 shares were sold on 11 November 1999 the cost attributable to them is £11,051.20 (50,000 x 22.1024). - Lane.
Editorial note.'Bartholomew's' solution, which was supported by one other reply, produces the result that the rights have a base cost equal to the amount actually paid for them, which runs against the normal capital gains tax treatment. I would therefore prefer 'Lane's' solution. The query does however illustrate the nonsensical practical problems thrown up by over-complex legislation designed to prevent simple planning which even the House of Lords considered to be benign.
I should be grateful if readers could consider the following share history :
50,000 shares
bought 8.11.99 £6,310
50,000 shares
sold 11.11.99 £5,600
50,000 shares
bought 1.12.99 £11,835
20,000 shares
sold 6.12.99 £6,675
5,555 shares acquired
under a 1:9 rights issue
9.12.99 cost £444 (by virtue
of 50,000 held on 1.12.99)
Under the share identification rules, the disposal on 11 November 1999 is matched with the acquisition on 1 December 1999 (being an acquisition within 30 days of a disposal), giving a net loss of £6,235. However, the rights issue is treated as being acquired on the same date as the shares from which it arose, in this case the acquisition on 1 December 1999.
As the 1 December 1999 acquisition has already been matched when the rights issue takes effect, should the new 5,555 shares be treated as a separate asset, as the original shares to which they would normally be added are theoretically no longer in existence? Therefore, it would appear that the subsequent disposal on 6 December 1999 should first be matched with the rights issue (5,555 shares), with the balance (14,445) being taken from the shares bought on 8 November 1999.
Or should the disposal on 11 November 1999 be matched with 50,000 of a combined 55,555 treated as purchased on 1 December 1999? The subsequent disposal on 6 December 1999 is then matched with the remaining 5,555 with the balance coming from the shares bought on 8 November 1999.
Is there not a danger of re-writing history if the latter is correct? If the rights issue was made on, say, 6 June 2000, based on holdings on, say, 2 December 1999, the 1999-2000 tax return would have to be amended as the amount and cost of shares acquired on 1 December 1999 will have now changed.
I should be grateful for advice on the correct treatment.
(Query T15,725) — Lighten our Darkness.
The best answer is given on the Revenue Help Sheet IR285 (Share reorganisations, company takeovers and capital gains tax), which states in summary:
* The issue of any new shares (resulting from a share reorganisation) is not treated as an acquisition.
* The loss or alteration of any old shares is not treated as a disposal.
* Because you are not treated as acquiring the new shares, the same day rule and the 'bed and breakfasting' rule do not apply.
From the above, given that the acquisition of shares on 1 December 1999 and the rights on 9 December 1999 are treated as a single asset acquired on 1 December, the inference is that only the original 50,000 qualify for 30-day matching and the 'rights' shares will be treated as being matched on a last in first out basis, as though they were acquired on 1 December. This treatment avoids any worry in relation to the adjustment to future tax returns following subsequent rights issues which would be required if the querist's suggested treatment were correct; in the example given by the querist (more rights in June 2000) it would be easy to amend the 1999-2000 return but if, say, four or five rights issues were made in respect of an original post 6 April 1998 holding over a number of years, each time there was a sale following a rights issue a number of tax returns would need to be amended as the base costs of all disposals of a holding forming part of the original acquisition would have been changed.
I consider the calculation to be as follows:
Date of Transaction No of Shares Cost
8.11.99 - purchase 5,000 6,310
6.12.99 - sale (20,000) (2,524)
8.11.99 - base date
carried forward 30,000 3,786
1.12.99 — purchase 50,000 11,835
11.11.99 — sale (50,000) (11,835)
1.12.99 — rights 5,555 444
1.12.99 — base date
carried forward 5,555 444
Note that if the sale on 6 December had occurred on the 9th or later, the 5,555 'rights' shares would have been matched against part of this on the last in first out basis.
If there were further rights issues, values of each attributable holding will be adjusted when part of a disposal is matched against it, with the balance carried forward offset against subsequent disposals e.g.
8.11.99 carried forward 30,000 3,786
1.6.00 rights 1:2 at £1 15,000 15,000
1.8.00 sale (15,000) (9,393)
carried forward base
8.11.99 30,000 9,393
Note that for taper relief purposes, the rights qualify with effect from the date of the original acquisition.
- Bartholomew.
The situation is that identified as a reorganisation by sections 126 and 127, Taxation of Chargeable Gains Act 1992. These provide that a rights issue of shares is to be combined with the original holding so as to create a single asset which is to be 'treated as the same asset acquired as the original shares were acquired'. See also the examples appearing in the article 'Identification Crisis' by Keith Gordon in Taxation, 24 August 2000, at pages 536 to 540.
It is considered that the rights issue has to be attached to the acquisition on 1 December 1999 with the practical outcome that all the costs of that acquisition require to be matched with the disposal on 11 November 1999.
It has been asserted that there was a net loss of £6,235 (£11,835 minus £5,600) but this should be calculated otherwise if the disposals are drawn indifferently from original shares and rights.
Section 105(1), Taxation of Chargeable Gains Act 1992 treats both the rights and the original shares as having been acquired by a single transaction. In other words, the costs of all acquisitions on the same day are pooled and then allocated so as to provide a unit price for the 55,555 shares within a 1 December 1999 dateline. Dividing £12,279 (£11,835 plus £444) by 55,555 yields a price of 22.1024 pence per share. As 50,000 shares were sold on 11 November 1999 the cost attributable to them is £11,051.20 (50,000 x 22.1024). - Lane.
Editorial note.'Bartholomew's' solution, which was supported by one other reply, produces the result that the rights have a base cost equal to the amount actually paid for them, which runs against the normal capital gains tax treatment. I would therefore prefer 'Lane's' solution. The query does however illustrate the nonsensical practical problems thrown up by over-complex legislation designed to prevent simple planning which even the House of Lords considered to be benign.
