This checklist explains the basic rules that apply in simple cases to the acquisition and disposal of shares by individuals, personal representatives and trustees during the tax year. It helps you calculate the capital gain or loss if you disposed of shares during this tax year. If in doubt about your situation, ask your tax advisor. HMRC can also help and you can read our Capital Gains Tax Handbook which explains the rules in more detail.
This help sheet explains:
- why special rules are needed
- how you identify the transferred shares
- how you calculate the gain according to the “guest room” rule
- how you calculate the gain if the shares are held in a section 104 operation
- the treatment of units of a mutual fund
It will help you complete the capital gains tax summary pages of your tax return. This checklist refers to acquisitions and divestitures. These are not limited to buys and sells, although they are the most common events. An important exception is where stock reorganizations such as rights and bonus issues, or an issue of stock on a takeover, are not treated as acquisitions. See help sheet 285 Capital gains tax, stock reorganizations and buyouts.
This help sheet also assumes that the capital gain or loss will be calculated using the actual costs of acquisition and the actual proceeds of disposal. The “Transfer of assets between related parties” section on page CGN 2 of the Capital Gains Tax Summary Notes explains when you should substitute market value for actual cost or disposal proceeds. .
Help Sheet 287 Employee Stock and Security Plans and Capital Gains Tax explains in more detail what shares you acquire through employment or by exercising a stock option. actions for employees.
Help Sheet 295 Relief for Gifts and Similar Transactions further explains the capital gains treatment of gifts, including gifts to charity. Help sheet 342 Charitable donations tells you about the income tax relief available for donations of certain stocks, securities and other investments to charity.
The general rules described in this help sheet may not apply to shares you have acquired under the Enterprise Investment Scheme (EIS), or shares of a venture capital trust (VCT). For general information on EIS and VCT shares see help sheet 297 Capital gains tax and the business investment regime and help sheet 298 Venture capital trusts and capital gains tax.
Ask us or your tax advisor if you need detailed information on the rules of EIS Where VCT shares.
These general rules do not apply to shares issued upon exercise of an option under the Enterprise Management Initiative on or after April 6, 2012. The rules applicable to these shares are explained in the help sheet 275 Entrepreneurs’ Relief.
Why special rules are needed
Shares of the same class of the same company are identical. Suppose you hold 12,000 shares of Wilson and Strickland plc 25 pence common stock acquired at different times at different prices. You then sell 2,000 shares. To calculate the gain, you need to know what cost can be attributed to the shares you sold. The capital gains rules for stocks allow you to do this.
Since April 6, 2008, all shares of the same class, in the same company, are grouped under the name of ‘Section 104 holding’. You add up the costs of the shares of this participation: each share of the participation is treated as if it had been acquired at the same average cost.
There are a few circumstances in which shares will not be considered part of the holding. Mainly actions affected by the “bed and breakfast” and “same day” rules.
Suppose you bought 12,000 ordinary shares of Wilson and Strickland plc 25 pence as follows:
|Dated||Number of shares|
|June 7, 1979||2,000 shares|
|November 4, 1982||2,500 shares|
|August 26, 1987||2,500 shares|
|July 7, 1998||3,000 shares|
|May 14, 2006||2,000 shares|
You would have a Section 104 holding of 12,000 shares – containing all of your purchases.
How to identify transferred shares
When you sell shares, you cannot calculate your capital gain or loss until you match the shares you sold with the shares you bought. You are treated as a transferor of shares in the following order:
|First||Shares acquired on the same day as the disposal (“same day” rule).|
|Second||Shares acquired within 30 days of the day of disposal (bed and breakfast rule) provided the person making the disposal was resident in the UK at the time of acquisition.|
|Third||Shares in Section 104 holding.|
If these rules do not exhaust the transferred shares, the remaining shares are matched against subsequent acquisitions, taking the oldest first.
Mr. Schneider owned 10,000 shares of Mesopotamia plc.
500 were purchased on September 11, 2021. The remaining 9,500 are held in Section 104 holding. Mr. Schneider sells 4,000 shares on August 30, 2021. The sales are identified as follows:
- 500 against shares purchased on September 11, 2021 under the “bed and breakfast” rule
- 3,500 against shares of Section 104 holding
How do you calculate the gain under the “guest rooms” rule?
If a sale of shares is identified with shares acquired within the following 30 days, the sale gain or loss corresponds to the difference between the net sale proceeds and the acquisition cost.
This ‘bed and breakfast’ rule does not apply if the person making the disposal was not UK resident for tax purposes at the time of the acquisition.
Continuation of example 2
Suppose Mr Schneider receives £6,000 for the 4,000 shares he sold and pays £850 for the 500 he bought a few days later. Because he bought additional shares within 30 days of the sale, 500 of the shares sold are not matched with shares of the holding company. They are identified with the 500 shares purchased on September 11, 2021.
The gain or loss on these shares is calculated as follows:
|Disposal proceeds (divided 500 ÷ 4,000 × £6,000)||£750|
How to Calculate the Gain for Shares of a Section 104 Interest
The Section 104 asset consists of a single set of expenses generally representing the actual cost of the shares.
The exception to using actual cost is if you owned some of the shares on March 31, 1982. In this case, you would need to use the market value of the shares on that day. If the shares were listed on a recognized stock exchange on March 31, 1982, you can find the value from authoritative published sources such as the Interactive Data Capital Tax Service. If not, you or your professional advisor will need to provide an assessment.
We will want to verify this assessment. Many listed companies have undergone stock reorganizations since 1982 and you will probably need to refer to Help Sheet 285 Capital Gains Tax, Stock Reorganizations and Company Takeovers.
The pool of eligible costs is adjusted each time a “defining event” occurs. A cause event is anything that reduces or increases the value of the cost pool. Purchases and sales of shares are the most common examples of causative events.
The basic steps for calculating a gain (or loss) on a disposal of shares of a Section 104 interest are as follows.
If all shares of the operation are transferred, the eligible expenditure corresponds to the entire cost pool. If only part of the shares are alienated, the authorized expenditure is a fraction of the actual cost pool. The fraction is the “Number of shares sold” divided by the “Total number of shares in operation”.
The residual cost of the holding company, to be identified with future disposals, is reduced accordingly. See example 3.
Units of a mutual fund
Units of a trust are treated as if they were shares of an ordinary corporation. The basic rules described in this memorandum also apply to these units (as well as to units of an investment fund or an investment company with variable capital). But there are a few additional points to note.
If you hold Accumulation Units, you will not receive income distributions from the Trust. Instead, the income is retained and automatically reinvested for you (a “notional distribution”). You do not receive any new units, but the value of your existing units is increased. If you receive notional distributions subject to income tax, the amount of such distributions is permitted to you as an additional expense on your accumulation units.
A unitary trust may take the form of an “umbrella system” authorized by the Financial Services Authority. These schemes have separate compartments which are treated as separate authorized mutual funds for capital gains tax (CGT) purposes. The change from units of one compartment to units of another will normally constitute a transfer of the old units, on which a capital gain or loss will occur. But if the conversion takes place in the context of a merger of sub-funds, the rules described in Help Sheet 285 Tax on capital gains, reorganizations of shares and buyouts may apply. If so, you are not considered to have disposed of your old units at the time of the merger.
Many licensed mutual funds, as well as licensed investment funds and open-ended investment companies, offer investors monthly savings plans. Practice Notice SP2/99 explains CGT treatment of units and shares in monthly plans.
Help for investors
See HS308 Investors’ Relief and Investors’ Relief guidance in the Capital Gains Tax Manual for more information.
Online forms, phone numbers and addresses for self-assessment advice.