With her mish-mash of shares and the end of the tax year looming, Alice can put some of her equity Oeic fund shares into a share pool and create £11,300 worth of gains.
When it comes to financial matters, keen swimmer Alice likes to be organised. Aware the end of the tax year is approaching, she is keen to make use of her annual capital gains tax (CGT) exemption before it is too late. After all, the motto is ‘use it or lose it’.
But Alice is puzzled. She is looking to sell some shares in her equity Oeic fund to crystallise a gain of £11,300. But the shares were all purchased at different times, in two tranches. Back in 2006 she invested £25,000 and obtained 10,000 shares, and in 2012 she invested a further £20,000 for 5,000 shares.
Alice needs help knowing which shares to sell and in what age order.
Alice’s adviser explains one feature of shares is that, unless they are numbered (and most shares are not), all shares of the same class in the same company are identical. To work out the capital gain it is therefore necessary to know which shares are being sold and at what cost.
Special ‘share pooling’ rules exist to deal with this problem. The Oeic shares Alice has bought will fall into her share pool, which grows when further shares are acquired and reduces when there is a disposal of shares from the pool.
Following the rules
Alice’s adviser further explains the tax rules are such that any disposals she makes will be identified in this order:
- Against acquisitions on the same day (the ‘same day rule’).
- Against acquisitions within the 30 days following the disposal (the ‘bed and breakfast’ rule).
- Against shares in the pool, but without identifying any particular shares.
The first two rules mean if Alice were to sell shares and buy back identical shares on the same day, or within the next 30 days, then for tax purposes, she would simply be disposing of those reacquired shares rather than shares from the pool. In other words, she would not be realising a capital gain up to her annual exemption as intended.
Alice’s adviser creates her share pool at the start of the tax year as follows:
The adviser explains her ‘pooled’ cost is therefore £3 per share. Given the current value is £5 per share, the CGT calculation is now straightforward. The gain per share is £2; £11,300 / £2 is 5,650, so 5,650 shares are sold to realise £11,300 worth of gains.
Alice’s adviser points out how disposing of some shares in her equity Oeic fund may also have income tax advantages for her. The dividend allowance of £5,000 is set to drop to just £2,000 for 2018/19. As she is a higher-rate taxpayer, she will then be paying 32.5% tax on dividends above this. Even if she owns accumulation shares where the income is not distributed, those distributions remain income for income tax purposes.
With the above in mind, Alice might wish to consider using some of the proceeds to fund an ISA or perhaps use the entire proceeds to fund a pension contribution or a non-income producing insurance bond. Additionally, there will be no need to wait 30 days in any of these cases.
Graeme Robb is senior technical manager at Prudential