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17 January 2001
Replies to Queries – 4
Lost in a pool
I am unclear how the taper relief provisions and the identification rules operate when a disposal of shares is matched with a holding of shares at 6 April 1998.
Lost in a pool
I am unclear how the taper relief provisions and the identification rules operate when a disposal of shares is matched with a holding of shares at 6 April 1998.
Replies to Queries – 4
Lost in a pool
I am unclear how the taper relief provisions and the identification rules operate when a disposal of shares is matched with a holding of shares at 6 April 1998.
The problem arises following a sale of shares in December 2000. This sale has been partly matched with a post 6 April 1998 purchase (X) on a last in first out basis. This purchase (X) has been eliminated so the remainder of the cost (Y) has been allocated from the holding at 6 April 1998. It would appear that the capital gains tax arising on the sale of the proportion of the shares allocated to the holding at 6 April 1998 (Y) may be eligible for a 5 per cent discount if they were held before 17 March 1998.
As the pooling system treats shares as a single asset, how is one to determine if the asset was held on 17 March 1998? Does it matter if there were purchases made between this date and 5 April 1998 and how are sales in that period treated for this purpose?
Also, if purchases between 17 March 1998 and 5 April 1998 are relevant, how is the date of a share purchase acquired under a save-as-you-earn contract determined? The form exercising the option to acquire the shares was signed on 13 March 1998 and the shareholder was on the register of members on 19 March 1998 according to the dividend voucher.
I appreciate that, if the pooled holding at 6 April 1998 is deemed to have been acquired at that date, taper relief would not be available in the circumstances described above. However, clarification would be appreciated.
(Query T15,739) – Pinfold.
The answer would appear to be that, whether the legislation was meant to apply in the way I suggest, the position is straightforward and not overly complicated.
Section 104, Taxation of Chargeable Gains Act 1992 states that 'any number of securities of the same class acquired by the same person in the same capacity shall for the purposes of this Act be regarded as indistinguishable parts of a single asset growing or diminishing' as shares are acquired or sold. In other words, if there is a section 104 holding, it is a single asset. As with any other aspect of taper relief, it is the time of acquisition of the original asset that is important and not the time of additions to that asset.
As a result, if there is a section 104 holding (previously called a 1985 pool) in existence at 17 March 1998 and 6 April 1998, the 'bonus' year for non-business taper (section 2A, Taxation of Chargeable Gains Act 1992) will apply. Therefore, the timing of acquisition of shares around 17 March 1998 will only be important if the section 104 holding, or pool, was not in existence at 17 March. The point is confirmed by paragraph 2.18 of the Revenue's Guide to the Capital Gains Tax Reform in the Finance Act 1988: 'Shares acquired in the period from 17 March to 5 April 1998 which are shares of the same class in the same company as shares already held on 16 March 1998 are treated [for taper relief] as acquired before 17 March 1998'.
If this is the case, section 28, Taxation of Chargeable Gains Act 1992 applies, as with any acquisition. The time of disposal or acquisition is the time the contract is made. The timing of the entry on the register should not be important. Therefore, look at the terms on which the option was granted. Is it exercised when the form is sent to or received by the company? – New Road.
As 'Pinfold' states, the pool at 5 April 1998 is treated as a single asset for capital gains tax purposes so the availability of tapering relief in this case hinges on whether that asset is deemed to have been acquired before 17 March 1998.
There is no question that, if all the shares in the 5 April 1998 pool were acquired before 17 March 1998, the 'bonus year' giving tapering relief here would be available; this is clarified by an example in The Chartered Institute of Taxation's annotated Finance Act 1998 which follows section 125 of that Act. Also, it is clear that if all the shares in that pool were acquired on or after 17 March, the bonus year would not be available since the deemed acquisition date of the asset cannot be earlier than that of the first holding purchased in the pool.
With regard to the position where some of the shares were purchased before 17 March 1998 and some on or after that date, the Inland Revenue Helpsheet IR279 (on taper relief) gives no definite answer but there is one example which states 'where assets have merged or divided and the asset that you disposed of derives some part of its value from an earlier asset in your ownership, the qualifying holding period may be extended'. The example given refers to a freehold of land sold in March 2000, acquired in February 1999, but the original leasehold was acquired on 8 January 1995 and this is taken as the relevant date for taper relief purposes, so the asset is treated as acquired on 17 March 1998. On this basis, my argument would be that because the shares bought after 17 March form part of the same asset for capital gains tax purposes as the later acquisition, that asset as a whole derives its value partly from the pre-17 March acquisition and the 'bonus year' of taper relief is therefore available.
With regard to the other points raised:
Transactions between 17 March and 5 April 1998
Sales would be subject to the following matching rules:
(i) Acquisitions on same day
(ii) Acquisitions in the following 30 days
(iii) Acquisitions in the previous 9 days
(iv) Finance Act 1982 pool
(v) Other pool holdings
These are the pre-Finance Act 1998 rules with the exception of (ii) as the 'bed and breakfast' was stopped from 17 March 1998; this is important as such a sale could be matched with part of a post 6 April 1998 holding. Any purchase on or after 17 March would be matched against sales in the previous 30 days so purchases up to 5 May 1998 could affect the composition of the 5 April 1998 pool.
Ultimately, provided that, after taking account of all previous transactions, there remains a 5 April 1998 pool holding of which at least part of the cost relates to a pre-17 March 1998 acquisition, the availability of taper relief is not affected. However, if, say, all the shares were sold before 16 March, and there was an acquisition(s) on or after 17 March which forms the entire current balance of the 5 April 1998 pool, taper relief is not available on the disposal of that holding (since none of the value is derived from a pre-17 March 1998 asset.)
Acquisition date of shares under Save-as-you-earn Contract
As is standard for capital gains tax purposes, the acquisition date is the date when the contract for transfer of the asset was signed, not the date when physical transfer of the asset takes place; in the case quoted it would therefore be 13 March 1998 and taper relief is available if the save-as-you-earn shares are the only shares in the 5 April 1998 pool. – Bartholomew.
Lost in a pool
I am unclear how the taper relief provisions and the identification rules operate when a disposal of shares is matched with a holding of shares at 6 April 1998.
The problem arises following a sale of shares in December 2000. This sale has been partly matched with a post 6 April 1998 purchase (X) on a last in first out basis. This purchase (X) has been eliminated so the remainder of the cost (Y) has been allocated from the holding at 6 April 1998. It would appear that the capital gains tax arising on the sale of the proportion of the shares allocated to the holding at 6 April 1998 (Y) may be eligible for a 5 per cent discount if they were held before 17 March 1998.
As the pooling system treats shares as a single asset, how is one to determine if the asset was held on 17 March 1998? Does it matter if there were purchases made between this date and 5 April 1998 and how are sales in that period treated for this purpose?
Also, if purchases between 17 March 1998 and 5 April 1998 are relevant, how is the date of a share purchase acquired under a save-as-you-earn contract determined? The form exercising the option to acquire the shares was signed on 13 March 1998 and the shareholder was on the register of members on 19 March 1998 according to the dividend voucher.
I appreciate that, if the pooled holding at 6 April 1998 is deemed to have been acquired at that date, taper relief would not be available in the circumstances described above. However, clarification would be appreciated.
(Query T15,739) – Pinfold.
The answer would appear to be that, whether the legislation was meant to apply in the way I suggest, the position is straightforward and not overly complicated.
Section 104, Taxation of Chargeable Gains Act 1992 states that 'any number of securities of the same class acquired by the same person in the same capacity shall for the purposes of this Act be regarded as indistinguishable parts of a single asset growing or diminishing' as shares are acquired or sold. In other words, if there is a section 104 holding, it is a single asset. As with any other aspect of taper relief, it is the time of acquisition of the original asset that is important and not the time of additions to that asset.
As a result, if there is a section 104 holding (previously called a 1985 pool) in existence at 17 March 1998 and 6 April 1998, the 'bonus' year for non-business taper (section 2A, Taxation of Chargeable Gains Act 1992) will apply. Therefore, the timing of acquisition of shares around 17 March 1998 will only be important if the section 104 holding, or pool, was not in existence at 17 March. The point is confirmed by paragraph 2.18 of the Revenue's Guide to the Capital Gains Tax Reform in the Finance Act 1988: 'Shares acquired in the period from 17 March to 5 April 1998 which are shares of the same class in the same company as shares already held on 16 March 1998 are treated [for taper relief] as acquired before 17 March 1998'.
If this is the case, section 28, Taxation of Chargeable Gains Act 1992 applies, as with any acquisition. The time of disposal or acquisition is the time the contract is made. The timing of the entry on the register should not be important. Therefore, look at the terms on which the option was granted. Is it exercised when the form is sent to or received by the company? – New Road.
As 'Pinfold' states, the pool at 5 April 1998 is treated as a single asset for capital gains tax purposes so the availability of tapering relief in this case hinges on whether that asset is deemed to have been acquired before 17 March 1998.
There is no question that, if all the shares in the 5 April 1998 pool were acquired before 17 March 1998, the 'bonus year' giving tapering relief here would be available; this is clarified by an example in The Chartered Institute of Taxation's annotated Finance Act 1998 which follows section 125 of that Act. Also, it is clear that if all the shares in that pool were acquired on or after 17 March, the bonus year would not be available since the deemed acquisition date of the asset cannot be earlier than that of the first holding purchased in the pool.
With regard to the position where some of the shares were purchased before 17 March 1998 and some on or after that date, the Inland Revenue Helpsheet IR279 (on taper relief) gives no definite answer but there is one example which states 'where assets have merged or divided and the asset that you disposed of derives some part of its value from an earlier asset in your ownership, the qualifying holding period may be extended'. The example given refers to a freehold of land sold in March 2000, acquired in February 1999, but the original leasehold was acquired on 8 January 1995 and this is taken as the relevant date for taper relief purposes, so the asset is treated as acquired on 17 March 1998. On this basis, my argument would be that because the shares bought after 17 March form part of the same asset for capital gains tax purposes as the later acquisition, that asset as a whole derives its value partly from the pre-17 March acquisition and the 'bonus year' of taper relief is therefore available.
With regard to the other points raised:
Transactions between 17 March and 5 April 1998
Sales would be subject to the following matching rules:
(i) Acquisitions on same day
(ii) Acquisitions in the following 30 days
(iii) Acquisitions in the previous 9 days
(iv) Finance Act 1982 pool
(v) Other pool holdings
These are the pre-Finance Act 1998 rules with the exception of (ii) as the 'bed and breakfast' was stopped from 17 March 1998; this is important as such a sale could be matched with part of a post 6 April 1998 holding. Any purchase on or after 17 March would be matched against sales in the previous 30 days so purchases up to 5 May 1998 could affect the composition of the 5 April 1998 pool.
Ultimately, provided that, after taking account of all previous transactions, there remains a 5 April 1998 pool holding of which at least part of the cost relates to a pre-17 March 1998 acquisition, the availability of taper relief is not affected. However, if, say, all the shares were sold before 16 March, and there was an acquisition(s) on or after 17 March which forms the entire current balance of the 5 April 1998 pool, taper relief is not available on the disposal of that holding (since none of the value is derived from a pre-17 March 1998 asset.)
Acquisition date of shares under Save-as-you-earn Contract
As is standard for capital gains tax purposes, the acquisition date is the date when the contract for transfer of the asset was signed, not the date when physical transfer of the asset takes place; in the case quoted it would therefore be 13 March 1998 and taper relief is available if the save-as-you-earn shares are the only shares in the 5 April 1998 pool. – Bartholomew.
