KNOWLEDGE DIRECT – CAPITAL GAINS TAX ON STOCKS & SHARES QUICK REFERENCE GUIDE 2 – SHARE IDENTIFICATION RULES (30 day and same day matching) For Financial Advisers only. This guide will help you to calculate the Capital Gains realised on the disposal of shares or units in a collective investment scheme. For simplicity, we’ll refer only to units in a collective investment scheme (a fund) in this guide. The guide only covers units acquired on or after 1 April 1982 and is not suitable for investments held by limited companies. Quick Reference Guide 1, Section 104 holdings, gives an overview of calculating gains on disposals and should be read in conjunction with this guide. FIRST Units acquired on the same day as the disposal (the ‘same day’ rule) SECOND Units acquired in the 30 days following the day of disposal (the ‘bed and breakfasting’ rule) THIRD Units in the Section 104 holding (i.e. the average cost for the holding) WHAT ARE THE SHARE IDENTIFICATION RULES? Historically, it was common practice for people to sell units and buy them back in a very short space of time. This allowed them to utilise their capital gains tax personal exemption each year and reset the base cost of these units - reducing future gains. This was known as ‘bed and breakfasting’ The introduction of ‘share identification’ rules put an end to this practice. Now units disposed of are matched with units purchased in the following order: 1 of 5
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KNOWLEDGE DIRECT – CAPITAL GAINS TAX ON STOCKS & SHARESQUICK REFERENCE GUIDE 2 –SHARE IDENTIFICATION RULES (30 day and same day matching)
For Financial Advisers only.
This guide will help you to calculate the Capital Gains realised on the disposal of shares or units in a collective investment scheme. For simplicity, we’ll refer only to units in a collective investment scheme (a fund) in this guide. The guide only covers units acquired on or after 1 April 1982 and is not suitable for investments held by limited companies.
Quick Reference Guide 1, Section 104 holdings, gives an overview of calculating gains on disposals and should be read in conjunction with this guide.
FIRST Units acquired on the same day as the disposal (the ‘same day’ rule)
SECOND Units acquired in the 30 days following the day of disposal (the ‘bed and breakfasting’ rule)
THIRD Units in the Section 104 holding (i.e. the average cost for the holding)
WHAT ARE THE SHARE IDENTIFICATION RULES?
Historically, it was common practice for people to sell units and buy them back in a very short space of time. This allowed them to utilise their capital gains tax personal exemption each year and reset the base cost of these units - reducing future gains. This was known as ‘bed and breakfasting’
The introduction of ‘share identification’ rules put an end to this practice. Now units disposed of are matched with units purchased in the following order:
1 of 5
EXAMPLE 1: 30 DAY AND S104 MATCHING
Your client owns 12,000 units in a fund
- 4,000 units are sold on 25 February for £10,480
- 500 were purchased on 11 March for £1,360
- 11,500 units are held in the s104 holding with a total cost of £24,988.55 (Calculating the total cost is covered in quick reference guide 1)
To calculate the gain on the 25 February disposal, the units sold are matched as follows:
First: There are no ‘same day’ purchases to match.
Total gain on 4,000 units is: £1,564.79 - £50 = £1,514.79
Second: 11 March is within 30 days of the sale. The ‘bed and breakfasting’ rule applies. The gain for these units is:
PROCEEDS – COST = GAIN OR LOSS
Proceeds = (£10,480/4,000) x 500 = £1,310 (proceeds received for the 500 units).
Cost = £1,360 (the amount paid on 11 March)
£1,310 - £1,360 = £50 loss
Third: The remaining 3,500 units sold are matched against the units in the s104 holding. The gain for these units is:
PROCEEDS – COST = GAIN OR LOSS
Proceeds = (£10,480/4,000 ) x 3,500 = £9,170 (proceeds received for the remaining 3,500 units).
Cost = (£24,988.55/11,500) x 3,500 = £7,605.21 ( This is the proportion of the £24,988.55 s104 which applies to the remaining 3,500 units)
£9,170 - £7,605.21 = £1,564.79 gain
2 of 5
EXAMPLE 2: SAME DAY, 30 DAY AND S104 MATCHING
Your client owns 15,000 units in a fund
- 5,000 units are sold on 3 February for £9,000
- 1,000 were purchased on 3 February for £1,830
- 2,760 were purchased on 3 March for £4,830
- 11,240 units are held in the s104 holding with a cost of £18,827 (Calculating the total cost is covered in quick reference guide 1)
The disposals are matched as follows:
First: 1,000 against the units purchased on 3 February 2020 under the ‘same day’ rule. Gain for these units is:
PROCEEDS – COST = GAIN OR LOSS
Proceeds = (£9,000/5,000) x 1,000 = £1,800 (proceeds received for the 1,000 units)
Cost = £1,830 (the amount paid 3 February)
£1,800 - £1,830 = £30 loss
Second: 2,760 against the units purchased on 3 March 2020 under the ‘bed and breakfasting’ 30 day rule. The gain for these units is:
PROCEEDS – COST = GAIN OR LOSS
Proceeds = (£9,000 / 5,000) x 2,760 = £4,968 (proceeds received for the 2,760 units)
Cost = £4,830 (the amount paid 3 March)
£4,968 - £4,830 = £138 gain
Third: The remaining 1,240 units sold are matched against the units in the s104 holding. The gain for these units is:
PROCEEDS – COST = GAIN OR LOSS
Proceeds = (£9,000 / 5,000) x 1,240 = £2,232 (proceeds received for the 1,240 units)
Cost = (£18,827/11,240) x 1,240 = £2,077 ( This is the proportion of the £18,827 s104 cost which applies to the remaining 1,240 units)
£2,232 - £2,077 = £155 gain
Total gain on 5,000 units is £155 + £138 - £30 = £263
3 of 5
The examples show that this is a complicated subject. However, understanding the identification rules can give you confidence when advising your clients on disposing of units.
EXAMPLE 3: USING 30 DAY MATCHING RULES TO YOUR ADVANTAGE
Your client owns 50,500 units in ‘Fund A’. These have a cost of £25,250.
Your client switches all units to ‘Fund B’. The current price on sale of Fund A is £0.8018, realising a gain of £15,240.90 ((50,500 * £0.8018) £40,490.90 - £25,250).
Your client rings you to discuss the switch as they are concerned that they may have created themselves a capital gains tax bill.
You recommend buying back half the units in Fund A as 30 days have not passed since the disposal. You arrange for the switch, rebuying the units sold for £19,947.50.
As a result of the repurchase in Fund A, the gain on the original disposal of that fund is recalculated as follows:
First: There are no ‘same day’ purchases to match.
Second: 25,250 against the units purchased within 30 days under the ‘bed and breakfasting’ rule
PROCEEDS – COST = GAIN OR LOSS
Proceeds = (£40,490.90 / 50,500) x 25,250 = £20,245.45 (proceeds received for the 25,250 units)
Costs = £19,947.50 (the price paid for the repurchase)
£20,245.45 - £19,947.50 = £297.95 gain
Third: 25,250 of the original sale is still matched against the units in the s104 holding
PROCEEDS – COST = GAIN OR LOSS
Proceeds = £20,245.45 (i.e. half the proceeds from the original sale)
Cost = (£25,250 / 50,500) x 25,250 = £12,625 ( This is the proportion of the £25,250 s104 cost which applies to the remaining 1,240 units)
£20,245.45 - £12,625 = £7,620.45 gain
Total gain on the original switch out of Fund A is now £7,620.45 + £297.95 = £7,918.40
As this is within the annual exemption (assuming no other disposals have occurred) no tax will be due on the switch. The remaining 25,250 units can be switched in the next tax year to avoid any capital gains tax bill for your client. Note: Depending on market movement, there may also be a gain as a result of the switch out of Fund B.
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