The share matching rules are an important element of capital gains tax calculations.
For example, 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 have you sold, and which have been retained?
The CGT 30-day rule explained
The share matching rules determining which shares have been sold are as follows:
- Shares bought and sold on the same day.
- Shares acquired within the 30 days following the sale (on a ‘first in, first out’ basis).
- The Section 104 holding (any other of the same type of shares held in any given company).
And the share matching rules override any physical distinction between the shares you hold, such as if you owned the shares across a number of different brokers or investing platforms.
Steps 1 and 2 are to prevent the practice of ‘bed and breakfasting’, which used to be a common tax-planning technique employed to take advantage of the CGT annual allowance.
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 cost comparable to the sale proceeds, thereby effectively earning a tax-free uplift in the cost of the shares held.
Since the rules on bed-and-breakfasting were changed back in 1998, it is no longer possible to undertake this specific type of transaction. However, it is often good practice to utilise an annual CGT 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 & ISA).
Further changes to the way CGT was calculated in 2008 (namely the abolition of taper relief and indexation) meant that the length of share ownership became no longer relevant for capital gains tax purposes.
As a result, under the share matching rules, 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, which is called the Section 104 holding.
How the Section 104 holding is calculated
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 then 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 500 shares are sold, the allowable cost for capital gains tax will be 25% of the total, and the value of the Section 104 would be reduced to £3,750 with the average price remaining at £2.50 per share.
If any shares were held at 31 March 1982, they pass into the section 104 holding at their March 1982 valuation rather than their original purchase cost.
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.
The Section 104 holding may also need to be adjusted if there were any share reorganisation or company takeovers along the way. There are examples and helpsheets on the HMRC website as to what to do in these instances.
A section 104 holding, or s104 holding, is an element of the share matching rules relating to capital gains tax. It is the total cost of all the shares you hold with the exception of any shares bought on that day or that are repurchased within the next 30 days. The value of the section 104 holding is adjusted over time for any part disposals that you make.
The bed and breakfasting rule was introduced in 1998 to stop people selling shares one day and then repurchasing them the day after in order to realise a small capital gain (usually less than their CGT annual allowance) and therefore creating a higher base cost for the shares for any future sales. Now, any shares sold and then repurchased within 30 days are deemed not to count as a disposal for CGT purposes.