Back to basics: Share matching

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By Duncan McKeller, Tax Lecturer

11 March 2019

In the run-up to the end of the tax year, many individuals may be considering realising capital gains to make use of their 2018/19 annual allowance of £11,700. Here is an overview from the CA Principles of Taxation course.

Making use of your annual allowance could involve selling shares from a share portfolio and therefore it is important for such individuals to have an appreciation of the share matching rules for individuals.

Shares Sold by an Individual

All of the shares held by one individual in one company are generally deemed to be treated as one asset (known as a “pool of shares”). When some shares are sold, the sale is of a part of the pool of shares, rather than of individual shares.

Identification Rules

We need identification rules so that we can establish which shares have been sold, and therefore what acquisition costs can be deducted from the disposal proceeds. The rules dictate the order in which the sold shares are matched with acquisitions.

There are some anti-avoidance rules which require certain shares to be deemed to be disposed of first. The identification rules for individuals can be found in s105 and s106A TCGA 1992, and these show that disposals should be matched in the following order:

  1. Shares acquired on the same day as the disposal; then
  2. Shares acquired within the following 30 days (earliest first) to combat anti-avoidance; then
  3. Shares acquired before the date of sale (using a “pooling” technique).

Illustration

Eric has the following transactions in the shares of Seagulls plc.:

DateAction Number of shares Value
 12 May 1992 Bought 950 shares £1,805
 02 Sep 1994 Bought 550 shares £1,045
 01 Jun 1998 Bought 4,000 shares £8,000
 20 May 2001 Bought 1,000 shares £12,000
 15 Mar 2019 Sold 6,200 shares £86,800
 04 Apr 2019 Bought 200 shares £2,700

Calculate Eric’s gain on his disposal of 6,200 shares in Seagulls plc.

No shares in Seagulls plc. were purchased by Eric on the date of sale (15 March 2019).

200 shares in Seagulls plc. were purchased by Eric in the 30 days following 15 March 2019 (on 4 April 2019) and are now deemed to have been sold.

The remaining 6,000 of the shares sold on 15 March 2019 are then deemed to be matched with earlier purchases i.e. from the pool. Prior to 15 March 2019, Eric had purchased 6,500 shares in Seagulls plc. so the sale of 6,000 shares comes from this pool of shares and is treated as a part disposal of the 6,500 shares. It is not attributed to individual purchases.

To calculate the cost of the earlier purchases (the ‘pool’), the costs should simply be added together and pro-rated for any disposals (£22,850 x 6,000/6,500 as shown below).

 NumberCost (£)
May 1992 950 1,805
September 1994 550 1,045
June 1998 4,000 8,000
May 2001 1,000 12,000
Pool total6,50022,850
Less: sale in March 2019(6,000)
(21,092)
Carried forward5001,758

The gain on the disposal in March 2019 is:

Proceeds £86,800
Cost - 4 April 2019 (£2,700)
Cost - pool (per above) (£21,092)  
Gain on disposal

£63,008

In this case Eric will end up paying tax on his disposal as it exceeds the annual exempt amount of £11,700. The rate of tax will depend on whether Eric was basic rate or higher/additional rate taxpayer. The tax will be due by 31 January 2020 and will not affect payments on account.

If Eric had wanted to sell just enough shares to keep his gain below £11,700, he should have sold 1,306 shares. Based on the figures above his sales proceeds would have been £18,284. The cost attributable to the disposal would have been £2,700 (being the cost of the April 2019 shares) and £3,888 (being 1,106/6,500 x £22,850).

Proceeds (1,306 x £14) £18,284
Cost - July 2018 (£2,700)
Cost - pool (per above) (£3,888)  
Gain on disposal£11,696

Rights Issues and Bonus Issues

We have examined the situation where an individual purchases a number of shares. However, it is possible that they may acquire additional shares by means of rights issues and/or bonus issues of shares.

A bonus issue is the distribution of free shares to shareholders based on existing shareholdings.

A rights issue involves shareholders paying for new shares, usually at a rate below market price and in proportion based on existing shareholdings.

For identification purposes, it is important that the acquisitions arising from bonus and rights issues are matched with the original holdings that have allowed the shareholder to take up the additional shares. They will be included in the pool calculation even where there is no cost.

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