After covering the basics of Capital Gains Tax (CGT) in a previous blog, I thought it may be useful to discuss the specific rules surrounding the selling of company shares.
Calculating the gain from selling shares
As with other assets, the gain on selling shares is calculated from taking the proceeds and subtracting the original cost and any other expenses from selling the asset. However, if you owned the shares on the 31st of March 1982 or received shares as a gift or inheritance after that date, you would use the market value of the shares on the day you received them, (or the 31st of March 1982 if you owned the shares on that date) instead of how much they cost.
If you received the shares from a spouse or civil partner while you were living with them, you would use the value of how much it cost them to buy the shares.
HM Revenue and Customs (HMRC) can help you when valuing shares if you fill in and send them this form. However, you would need to give them two months to complete the valuation. You should use the form after you have disposed of (or sold) the shares.
Selling a portion of your shares
If you only sell a portion of your shares, calculating the gain can be complicated if you have shares from the same company purchased at different times. This is because the cost of the individual shares would vary depending on when they were bought.
To calculate the cost of your shares you should follow three steps. Firstly, the match shares you have sold against any shares you have bought on the same day. Secondly, you should match any “outstanding” sold shares against shares you have purchased up to 30 days after you made the sale. Finally you would match the remaining shares against shares bought at any other time, for example, if you buy 100 shares costing £1 each and 50 shares costing £4 each, the total shares would be 150 costing £300, or £2 each.
Once you have matched your shares you can work out how much they cost to use in the capital gains calculation. For example, you sell 300 shares for £1,200. You bought 50 shares on the same day for £200 so you can match 50 of your sold shares to it. You also bought 100 shares fifteen days later for £400 allowing you to match another 100 shares against it. The remaining 150 sold shares are matched against your remaining 300 shares worth £300 as there are more shares remaining than sold you only match against 150 worth £150. Your total cost becomes £200 added to £400 and finally adding £150 giving a total cost of the shares sold to be £750. You take your proceeds of £1,200 and subtract £750 giving you a capital gain of £450.
Bonus and rights issue shares
Sometimes a company will issue bonus shares to people who buy multiple shares, for example, one free bonus share per every four bought. The resulting impact of this is that the cost of shares is spread out further to include these shares, for example, if you buy four shares for £100 and get a bonus share, the cost of each share becomes £20 and not £25 which you actually paid for the original shares.
Rights issue shares are similar, except you are offered shares at a lower rate. The number of shares will depend on the number of shares you own, so you could be offered to buy one share for every two shares you own. The effect is the same as bonus shares where the cost of each share is reduced as the cost is spread out between all of the shares.
If you would like further advice or assistance regarding the above, please do not hesitate to contact us.