CGT: Shares and securities for individuals

Question 1

All shares and securities disposed of by an individual are subject to capital gains tax except for the following, which are exempt:

Answer 1

• listed government securities ( gilt-edged securities or gilts)
• qualifying corporate bonds (e.g. company loan notes)
• shares held in an Individual Savings Account (ISA)

Question 2

A qualifying corporate bond is one that:

Answer 2

• represents a normal commercial loan
• is expressed in sterling and has no provision for either conversion into, or redemption in, any other currency, and
• was issued after 13 March 1984 or was acquired by the disposer after that date (whenever it was issued)

Question 3

How is identified market value of quoted shares when shares are either gifted or transferred to a connected party?

Answer 3

• determined by taking the mid-price (average) of the prices quoted in the Stock Exchange Daily Official List on the disposal date

Question 4

It is necessary to have identification (or matching) rules to determine which shares have been disposed of as:

Answer 4

• shares and securities that are bought in a particular company of the same class are not distinguishable form one another
• each time shares are bought in any quoted company the price paid may be different
• they enable you to decide which shares have been sold and to work out the allowable cost to use in the capital gains computation

Question 5

When shares are disposed of they are matched against shares acquired of the same class in the following order:

Answer 5

1 On the same day as the date of disposal
2 Within the following 30 days
3 From the share pool ( shares acquired before the date of disposal are all pooled together)

Question 6

The share pool

Answer 6

• contains shares in the same company, same class purchased before the date of disposal
• simply keeps a record of the number of shares acquired and sold and the cost of those shares
• when shares are disposed of out of the share pool, the appropriate proportion of the cost which relates to the shares disposed of is calculated
• the shares are disposed of at their average cost

Question 7

What is a bonus issue?

Answer 7

• is the distribution of free shares to shareholders based on their existing shareholding

Question 8

Capital gain tax purposes, bonus issue is treated like:

Answer 8

• for the purposes of the share identification rules the bonus shares acquired are included in the share pool at nil cost
• the bonus shares are not treated as a separate holding of shares

Question 9

What is the right issue?

Answer 9

• is the offer of new shares to existing shareholders only, in proportion to their existing shareholding, usually at a price below the current market price

Question 10

Definition of a reorganisation

Answer 10

• involves the exchange of existing shares in a company for other shares of another class in the same company

Question 11

Definition of a takeover

Answer 11

• occurs when one company acquires the shares in another company either in exchange for shares in itself, cash, or a mixture of both

Question 12

Where the consideration for the reorganisation or takeover only involves the issue of shares in the acquiring company, the tax consequences are:

Answer 12

• no CGT is charged at the time of the reorganisation/takeover
• the cost of the original shares becomes the cost of the new shares
• where the shareholder receives more than one type of share in exchange for the original shares, the cost of the original shares is allocated to the new shares by reference to the market values of the various new shares on the first day of dealing in them
• this treatment is automatic

Question 13

If the consideration for the takeover includes a cash element:

Answer 13

• there is a part disposal of the original shares
• a gain arises on the cash element of the consideration on the date the cash is received

Question 14

Shares - cash proceeds - part disposal computation

Answer 14

((Cash received/ (Cash received + M.V. of new shares)) x Cost of original shares