CGT – Share Matching Rules

One element in the capital gains tax calculations specifically in relation to shares is the rules that govern share matching — i.e. if you sell 500 out of a holding of 2,000 shares that were bought in tranches of 100 shares at different times for different prices, exactly which shares do you sell, and which are retained?

The basic rules to determine which shares are sold are as follows:

  1. Shares bought and sold on the same day.
  2. Shares acquired within the 30 days following the sale (on a ‘first in, first out’ basis).
  3. The “Section 104” holding (any other of the same type of shares held in any given company).

Steps (1) and (2) above are there to prevent the practice of ‘bed and breakfasting’, which was a common tax-planning technique employed to take advantage of the capital gains tax annual exempt amount.

The idea was that a calculated number of shares would be sold, sufficient to generate a gain approximately equal to the annual exemption, and the exact same number of shares would be repurchased with the proceeds, at a costs comparable to the sale proceeds, thereby effectively earning a tax-free uplift in the cost of the shares held.

Although it is no longer possible to undertake this specific type of transaction, it is often good practice to utilise an annual exemption wherever possible and there are a number of similar ideas that may still be of use (such as selling shares outside of an ISA and then rebuying within an ISA – known as bed and ISA).

The abolition of taper relief and indexation in April 2008 meant that the length of share ownership became no longer relevant for capital gains tax purposes. As a result, all shares of the same class in the same company that do not fall within (1) and (2) above are treated as a single asset, called the Section 104 holding.

The cost of any given share in a Section 104 holding is calculated with reference to the total amount paid for the overall holding divided by the number of shares held. For example, if 2,000 shares had been purchased in 500 share tranches, costing £500, £1,000, £1,500 and £2,000; the total cost of those 2,000 shares is £5,000, or £2.50 per share.

This means that, when calculating gains on the sale of shares, it is only necessary to know the total number of shares and total amount paid for them, even if a partial disposal is made — if only 1,000 shares are sold, the allowable cost for capital gains tax will be 50% of the total; if only 500 shares, 25%.

Shares acquired before 6 April 2008

If shares have been acquired pre 6 April 2008, but none of those shares have been sold, these shares will pass into the Section 104 holding as a single asset, i.e. a total number of shares at a total cost/value.

If shares were held at 31 March 1982, they will pass at their March 1982 valuation; if shares have been inherited they will pass at probate value, and if shares have been received by way of gift they will pass at the market value at time of transfer, unless a holdover claim was made.

Note that if you made part disposals prior to 6 April 2008 then the calculation of the value of the Section 104 holding can get more complicated.


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