The Capital Gains Tax rules and regulations for dealing with the sales of shares are very complicated. However in the majority of circumstances where there is a simple purchase or sale of the same number of shares the calculations are relatively simple.
Special rules apply for partial disposals, rights issues and bonus issues and where a share is taken over by way of a share for share swap in the case of company amalgamations and reorganizations.
The gain on a sale of shares is calculated in the same way as for any other asset. You deduct the allowable cost price from the net sale proceeds. The answer will be either a gain or a loss.
The original cost price of the shares may be increased for inflation during the period of ownership up to the 31 December 2002 – known as indexation relief. Thereafter no inflation increase is allowed. However the application of the inflation relief to the original cost price cannot create a tax allowable loss. There is no inflation relief allowed where shares are purchased and sold within the same twelve month period.
Any losses incurred on the disposal of other assets in earlier years or during the year of sale of the shares can be offset against any gain arising on a disposal in the current year.
If you have disposed of a number of different shares during the year you must complete a separate calculation for each transaction.
FIFO Rule and treatment of Bonus and Rights issues
This area causes a lot of confusion. The First In First Out (FIFO) rule applies to the total number of shares you own in any particular company. However within that shareholding you may have acquired some shares on the open market and others through Bonus or Rights issues.
Each acquisition of shares on the open market is treated as a separate asset within the overall asset which is your total shareholding in that particular company.
Any shares acquired by way of a bonus issue or rights issues are treated as acquired at the same time as the original shareholding.
A bonus issue does not involve a cost so the original cost of the shares is then spread over the total number of shares owned after the bonus issue.
A rights issue will involve a cost and this cost price is treated as additional expenditure on the original shareholding. These rules can be hard to follow when for one company you have a mixture of original purchases, bonus issues, rights issues and further purchases of shares on the market.
Company Amalgamations and Takeovers
There are special rules and regulations here to deal with company takeovers and amalgamations covering what are known as share for share swap and shares plus cash for share swaps.
Shares for Shares
Share for share swaps are relatively straightforward. Assume you own shares in company A. Company B takes over company A. You receive shares in company B in return for all of you shareholding in company A. The result is you are now a shareholder in company B. The cost of your shares in company B is deemed to carry the same cost history as your shares in company A. This means that you treat the new shares you own in company B as having been purchased at the same time and for the same cost price as your original shareholding in company A.
Shares for Shares plus Cash
When you receive both shares and cash in return for your original shareholding in company A you are treated as disposing of part of your shareholding in company A and you have to calculate the gain or loss arising thereon at that point in time.
Sale of Rights Issues
When you are a shareholder in a public company you may obtain rights to subscribe for new shares in that company sometimes at a discount to the market price. Generally speaking the extent of your rights for additional shares will depend on the number of shares you hold in the company. If you purchase shares through a rights issue you will have a cost price for the number of shares acquired and this is added to your existing portfolio of shares in that particular company. Alternatively you may be entitled to dispose of your rights to acquire shares. If you receive consideration for the disposal of your rights without acquiring shares then this is treated as a partial sale of your original shareholding.