ACCA F6 FA09 Study Text 2010

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Chapter 13: Capital gains tax

Example

Ian bought an antique vase in August 1999 for £79,200. In August 2009 the vase was

damaged and in December 2009 Ian received £40,000 compensation from his

insurance company. The value of the vase in its damaged state is £105,600.

Required

(i) Calculate the chargeable gain arising in 2009/10 and the base cost of the vase

assuming none of the compensation is used to restore the asset.

(ii) Explain the capital gains consequences of restoring the asset with the

compensation.

Answer

(a) Part disposal at the time of the receipt of the compensation

Insurance proceeds (December 2009)

40,000

Less Allowable cost

105,600+40,000

40,000

(£79,200)×

(21,758)

–––––––––––––––––––––––––––––––––

–

Gain 18,242

–––––––––––––––––––––––––––––––––

–

Base cost of the vase:

Original cost 79,200

Used in the part disposal computation (21,758)

–––––––––––––––––––––––––––––––––

–

57,442

Restoration costs

Nil

–––––––––––––––––––––––––––––––––

–

Base cost 57,442

–––––––––––––––––––––––––––––––––

–

(b) Consequences of restoring the vase

The insurance proceeds received = £40,000

95% of the insurance proceeds = £38,000

If £38,000 or more is spent on restoration:

 the consequences are as explained above, but an election can be made to

defer the charge to CGT

 if an election is made, no part disposal occurs, no CGT charge arises

 the base cost of the vase is:

− reduced by the insurance proceeds received, and

− increased by restoration costs which are treated as enhancement

expenditure.

Paper F6 (UK): Taxation FA2009

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If less than £38,000 is spent on restoration:

 if no election is made the consequences are as explained above

 but an election can be made to compute a different part disposal

computation based on:

− the insurance proceeds received after deducting restoration costs, and

− looking at the value of the asset after restoration.

Paper F6 (UK)

Taxation FA2009

CHAPTER

CGT - Shares and securities

Contents

1 The disposal of shares and securities by an

individual

2 The valuation rules for shares

3 The share identification rules for individuals

4 Bonus issues, rights issues, takeovers and

reorganisations

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The disposal of shares and securities by an individual

 Shares and securities that are chargeable to CGT

1 The disposal of shares and securities by an individual

1.1 Shares and securities that are chargeable to CGT

All quoted and unquoted shares and securities are chargeable assets for CGT

purposes with the exception of the following securities:

 Qualifying Corporate Bonds (QCBs), and

 Gilt-edged securities (gilts).

Disposals of QCBs and gilts by an individual are exempt from CGT. However, they

are not exempt assets for company disposals and corporation tax purposes.

QCBs are defined as corporate securities issued after 13 March 1984 which represent

a normal commercial loan that is expressed in sterling and cannot be converted into

any other currency.

In the examination, company debentures and loan stock are assumed to satisfy these

conditions and are therefore treated as QCBs, unless it is clearly stated otherwise.

Gilts are government securities, quoted on the Stock Exchange. They are usually

called Treasury stock or Exchequer stock.

Chapter 14: CGT – Shares and securities

The valuation rules for shares

 The valuation rules for shares

2 The valuation rules for shares

When quoted shares and securities are gifted, or sold to a connected person for less

than their market value, it is necessary to place a value on the disposal for CGT

purposes.

Quoted shares are quoted by stock market dealers at two prices: a lower price at

which they will buy the shares and a higher price at which they will sell them.

A transaction in quoted shares is known as a bargain.

Quoted shares are valued at the lower of two values, as follows:

Lower of pence

(1) The quarter up rule

Lower quoted price X

Plus ¼ × (Higher quoted price less Lower quoted price)

(2) The average of the highest and lowest marked bargains of that day

(if any)

½ × (Highest marked bargain + Lowest marked bargain) X

Example

Andrew gifts his 2,000 ordinary shares in X plc to a friend. At the date of the gift the

shares are quoted at 363p – 379p, with marked bargains on the day of 365p, 370p

and 377p.

Required

Calculate the value of the shares gifted to Andrew’s friend for capital gains tax

purposes.

Answer

The X plc shares are valued at the lower of: pence

(1) The quarter up rule

363 plus ¼ × (379 less 363)

367

(2) The average of the highest and lowest marked bargains of that day

½ × (377 + 365) 371

Here, the shares are valued at 367 pence.

Value of 2,000 shares = 2,000 × £3.67p 7,340

Paper F6 (UK): Taxation FA2009

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The share identification rules for individuals

 The share identification rules for individuals

 Acquisitions in the next 30 days

 The share pool

3 The share identification rules for individuals

3.1 The share identification rules for individuals

When purchasing shares, an individual must keep separate records for each

different type and class of company shares purchased. For example X Ltd ordinary

share purchase records are kept separate from Y Ltd ordinary share purchase

records, which are kept separate from Y Ltd preference share purchase records, and

so on.

To identify which shares have been disposed of, the share identification rules are

applied. For the purpose of your examination, shares are disposed of by an

individual in the following order:

(1) Acquisitions on the same day as the disposal

(2) Acquisitions in the next 30 days on a first-in-first-out basis

(3) Shares in the share pool

3.2 Acquisitions in the next 30 days

The future 30-day rule exists as an anti-tax avoidance measure. It was introduced to

prevent a scheme known as bed and breakfasting.

Prior to this ruling, individuals could deliberately sell shares one day and

repurchase them the next day (or shortly afterwards) in order to:

 realise a gain, but pay no tax as the gain was covered by the annual exemption,

and

 establish a higher base cost for the shares for the purpose of calculating the gain

on future disposals.

3.4 The share pool

An individual with many investments in companies will need to construct a share

pool for each company and each class of share.

The share pool is treated as a single asset, with shares disposed of at their average

cost.

Chapter 14: CGT – Shares and securities

The working for the share pool is shown as follows:

Number of

Original cost

Acquisition 1 X

Acquisition 2 X

Sale (at average cost) (X)

(X)

Pool balance c/f X

The appropriate proportion of cost to deduct when shares are sold is calculated as

follows:

Total cost to date ×

Number of shares disposed of

Number of shares held (before the disposal)

Example

Beth purchased shares in Y Ltd as follows:

Cost

16 May 1997 5,000 shares 34,500

27 March 2010 6,500 shares 37,700

On 13 March 2010 she sold 10,000 shares in Y Ltd for £96,000.

Required

Calculate the chargeable gains arising on the disposal of Beth’s shares.

Answer

Matching rules

Number of

shares held

Disposal

13 March 2010

Remaining

1. Acquisitions in the next 30 days

27 March 2010 6,500

(6,500)

Nil

2. Pool shares 5,000

(3,500)

1,500

11,500

(10,000)

1,500

The disposal value of each share was £96,000/10,000 shares = £9.60 per share.

(1) Chargeable gain on the disposal of shares acquired on 27 March 2010

Gross sale proceeds (£96,000 ÷ 10,000) × 6,500

62,400

Minus Cost (37,700)

Gain

24,700

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(2) Chargeable gain on the disposal of shares in the share pool

Working:

Number of shares Original cost

Purchase on 16 May 1997 5,000

34,500

Sale on 13 March 2010 (note) (3,500)

(24,150)

Pool balance c/f 1,500

10,350

Note

Shares sold from the pool are removed at average cost. In this example, 3,500

shares out of 5,000 shares in the pool were sold.

Cost: £34,500 × 3,500/5,000 = £24,150

Gross sale proceeds (£96,000 ÷ 10,000) × 3,500

33,600

Minus Cost (from pool, see working) (24,150)

Gain

9,450

The total chargeable gains on the share disposal are therefore (1) £24,700 + (2)

£9,450 = £34,150.

Chapter 14: CGT – Shares and securities

Bonus issues, rights issues, takeovers and reorganisations

 Bonus issues

 Rights issues

 Takeovers

 Reorganisations

4 Bonus issues, rights issues, takeovers and

reorganisations

4.1 Bonus issues

Bonus issue shares are free shares issued to existing shareholders in proportion to

the number of shares already held.

For example, a 1 for 3 bonus issue means that for every 3 existing shares held, 1 free

share will be issued to each shareholder.

Bonus shares are treated as if they are acquired on the same day as the original

shares to which they relate.

Example

On 23 August 1999 Carl purchased 3,000 ordinary shares in M plc for £45,000. On 6

April 2008 M plc made a 1 for 6 bonus issue.

On 31 December 2009 Carl disposed of 3,000 of his shares in M plc for £60,000.

Required

Calculate the chargeable gain arising on the disposal of shares.

Answer

Chargeable gain on the disposal of shares in the share pool

Working

Number of

Original cost

Purchase on 23 August 1999 3,000 45,000

Bonus issue 500 Nil

–

–––––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––

3,500 45,000

Sale on 31 December 2009 (note) (3,000) (38,571)

–

–––––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––

Pool balance c/f 500 6,429

–

–––––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––

Paper F6 (UK): Taxation FA2009

Note

Shares sold from the pool are removed at average cost:

£45,000 × 3,000/3,500 = £38,571

Gross sale proceeds

60,000

Minus Cost (from pool, see working) (38,571)

Gain

21,429

4.2 Rights issues

A rights issue takes place when a company makes an offer of new shares to its

existing shareholders, giving them the opportunity to purchase shares in the

company in proportion to the number of shares they already hold. Shares in a rights

issue are sold at an attractive price (i.e. for less than the current market value) to

persuade shareholders to buy them.

For example, a 1 for 5 rights issue means that for every 5 existing shares they hold, the

shareholders have the right to purchase 1 additional share at the attractive offer price.

Rights shares are treated as if they are acquired on the same day as the original

shares to which they relate.

Example

The facts are the same as in the previous example involving Clive. However, it is a

rights issue rather than a bonus issue that takes place on 6 April 2008. The rights

issue is 1 for 6 at for £10 per share and Carl bought all the shares that were offered

to him in the issue.

Required

Calculate the chargeable gains arising on the disposal of shares.

Answer

Chargeable gain on the disposal of shares in the pool

Working

Number of

Original cost

Purchase on 23 August 1999 3,000 45,000

Rights issue 500 5,000

–

–––––

–

–––––––––––––––––––

–

––––

–

–––––

–

––––––––––––––––––––––––

3,500 50,000

Sale on 31 December 2009 (note) (3,000) (42,857)

–

–––––

–

––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––

Pool balance c/f 500 7,143

–

–––––

–

––––––––––––––––––––––––

–

–––––

–

––––––––––––––––––––––––