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Replies to Queries -- 1 - Share transaction matching

14 March 2001
Issue: 3798 / Categories:
Replies to Queries – 1

Share transaction matching
I have a client (Mr F) who became non-resident (working full-time in the United States) in January 2000. He had not been non-resident previously, so falls within the new rules for 'temporary non-residents'.
Replies to Queries – 1

Share transaction matching
I have a client (Mr F) who became non-resident (working full-time in the United States) in January 2000. He had not been non-resident previously, so falls within the new rules for 'temporary non-residents'.
Mr F already had a holding of some non-United Kingdom shares, the last acquisition in 1999-2000 having been made prior to becoming non-resident. On 5 April 2000, some shares were sold but on 6 April 2000 he acquired some further shares (more than the number sold). The tax return was completed on the basis that the sale of the shares was matched with the shares already held, but I realise this may be incorrect (it will result in a refund for 1999-2000 if that is the case).
As the shares acquired on 6 April 2000 were purchased when Mr F was non-resident, any gains from these shares should not be charged (nor any losses allowed). If, however, I follow the strict rules for identification, the shares sold on 5 April should have been matched with some of those purchased on 6 April 2000.
Can anyone enlighten me, please, whether my original computation (i.e. matching with previously acquired shares) was correct or whether I should revise the computation?
(Query T15,768) – MET.

In R v Commissioners of Inland Revenue ex parte Fulford-Dobson [1987] STC 344 a taxpayer placed reliance on Inland Revenue Extra-statutory Concession D2 (Residence in the United Kingdom: year of commencement or cessation of residence – capital gains tax), which then excluded capital gains tax on disposals effected after the date of departure from the United Kingdom in the course of a year of assessment. The Revenue refused to apply the concession, by reason of attendant circumstances, and the concession has since been modified to apply only if the individual concerned was not resident and not ordinarily resident for the whole of at least four out of the seven preceding years.
The Interpretation Act 1978 offers no guidance as to the meaning of 'person' except to say that it includes bodies corporate and unincorporate. Sections 1 and 2 between them of the Taxation of Chargeable Gains Act 1992 make a person chargeable to capital gains tax in respect of chargeable gains accruing to him in a year of assessment during any part of which he is resident or ordinarily resident in the United Kingdom.
There is nothing to warrant supposing that different rules of computation apply to the gains accruing to such a resident (as Mr F is) merely because earlier or later he is non-resident.
The whole body of rules in Part IV of the Taxation of Chargeable Gains Act 1992 makes it clear that the acquisition within thirty days requires to be matched with the disposal on 5 April 2000. – M.C.N.

Aside from United Kingdom tax issues, the United States tax position should be considered since the client will need to report the transaction in the United States.
Unless Mr F is present in the United States under an F-1 or J-1 visa (these are given to students and trainees), he will be regarded as a resident alien of the United States at the date of sale (5 April 2000).
In the United States, shares are generally identified on a first in first out basis unless the seller tells the broker which specific securities are being sold. Thus the United States will almost certainly treat the shares sold as those purchased earliest.
There are 'wash sale' rules in the United States that serve to identify shares purchased the day after sale with similar shares sold the day before but these rules merely limit the way that losses can be relieved.
This American identification rule will result in United States tax payable on the gain. For United States tax purposes, gains are only regarded as foreign source if there is at least 10 per cent foreign tax payable on the gain. Because of the annual exemption in the United Kingdom, indexation allowance and taper relief, it is rare for share sales to result in greater than 10 per cent of United Kingdom tax payable for the 'average Joe'.
This sequence of events will, therefore, likely result in real United States tax payable on the profit.
Following the introduction of the five-year rule in the United Kingdom, the advice these days for individuals moving to the United States with United Kingdom shares is often to sell the lot before moving to the United States! This is hardly much consolation at this point, but Mr F should be more careful in the future! – DMT.

Issue: 3798 / Categories:
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