Shares and Capital Gains Tax

The rules regarding shares and capital gains tax have given many investors a serious headache.

CGT is a tax on assets.It specifically does not apply to cash, provided it is in £ sterling. You can dispose of any amount of cash to anyone without any capital gains tax implications, although inheritance tax could be a different story. If they can't get you one way…death and taxes!

One of the most common assets chargeable to CGT is company shares, but the sweeping changes from 6 April 2008 had a big effect on the way gains are now calculated for many shareholders.

The way things were

Before this date, shares qualified for indexation allowance and taper relief, both of which relied on length of ownership.

Indexation was introduced on 31 March 1982 and shares held since this date benefited from more than 100% allowance, effectively doubling the original cost or rebased value. Shares held at 31 March 1982 were 'rebased' at that date, meaning that the shares were given an attributed cost equal to the current market value, effectively wiping out any earlier gain. The March 1982 value is often, but not always, higher than original cost, but if cost generates a lower gain, this value can be used instead.

Many people felt that a rebasing exercise should have taken place in March 1998, when indexation allowance, a reflection of inflation, was frozen or in March 2008 when it was scrapped, along with taper relief. The last rebasing prior to 1982 was in 1965, 17 years earlier, so it could be argued that this is already ten years late.

The current rules

CGT has now become less complicated, although in many cases, more expensive than previously. 

Gains are calculated on a proceeds less cost basis and a flat rate of tax at 18% is then applied to sums exceeding the annual exempt amount, which is £10,100 per person for the 2009/10 tax year.

Incidental costs of acquisition and sale also reduce the amount of the gain. Costs such as stamp duty reserve tax, broker's fees and commissions may all be deducted when computing a gain. Exchange rate translations if purchasing shares or securities in currencies other than sterling could increase, reduce or even create a gain, as gains on currency are chargeable to CGT in a way £ sterling is not.

If you only dispose of part of your holding then there are various rules to decide which shares you have sold for tax purposes. 

Entrepreneurs' Relief

Many shareholdings that would have qualified for business asset taper relief will not qualify for entrepreneurs' relief. A holding of quoted shares will only qualify if 5% is owned (although again, AIM shares are treated as unquoted) and the shareholder is an officer or employee of the company in question. There is also a minimum holding period of one year.

Gifts

Of course, you may decide to give your long-suffering children some parts of your share portfolio. Here you would be making a disposal without receiving any proceeds. It would be nice to think this would generate a capital loss equal to the cost of the shares, in this type of situation the market value at the date of disposal is substituted for the lack of proceeds. This means that the generous parent could be faced with a capital gain even though they received no cash for the shares with which to pay the tax bill.

There is a relief available for gifts of business assets which effectively transfers the gain arising to the new owner of the shares, to be paid when they eventually sell the shares. However, quoted company shares, which does not include shares listed on AIM, will not qualify as business assets, and a 5% holding in unquoted shares is required, thus parents so inclined may be better off selling their shares to a third party and then gifting the cash proceeds net of any tax due to their children.

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Negligible Value Claims

Of course, all this talk of capital gains could be quite grating for those who have the misfortune to be in possession of shareholdings that are, possible literally, not worth the paper they are printed on.

Where a share becomes worth 'next to nothing' it is possible to make a claim for the shares to be considered of negligible value. If the claim is accepted, it is possible to generate a capital loss equal to the original cost incurred on the acquisition of the shares. HM Revenue and Customs also publish a list of quoted companies they consider to be of negligible value.

Overall, CGT is simpler than it was, but there are still tricks and turns to think about when considering transactions in shares.