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In many respects stocks and shares are handled in the same way as other assets. The problem arises in identifying what has been sold. For example if 100 shares are purchased in January, another 100 in February and then 50 shares are sold in March; which shares are sold? Is it 25 from January and 25 from February, or 50 from January or 50 from February? The identification of shares is important because it will affect the overall gain or loss.
For example, if in the example above, the shares were priced at £1/share in January, £3/share in February and £2/share in March, the results will vary depending on whether January's or February's shares are sold.
3 - FA85 Share Pool (s104 Holding)
4 - Restrictions on Indexation Allowance
Share identification is achieved by following the matching rules:
Same day acquisitions
Acquisitions in the following 30 days on a FIFO (first in, first out) basis
Other acquisitions after 5/4/98 on a LIFO (last in, first out) basis
Shares in the FA85 share pool (s104 holding) at 5/4/98
Shares from the 1982 holding
Shares held at 5/4/65 on a LIFO basis
Any other shares held (this will be shares acquired more than 30 days after the disposal on a FIFO bas
Rules 6 and 7 are not covered by IRIS. These matching rules apply to disposals made on or after 6/4/98 (the 1998-99 year onwards).
The 1996-97 and 1997-98 years are covered by different, simpler rules:
Same day acquisitions
Shares acquired in the previous 9 days on a FIFO basis
Shares in the FA85 share pool
Shares from the 1982 holding
Shares held at 5/4/65 on a LIFO basis
The last rule is not covered by IRIS. Note that no indexation allowance is applied to shares sold within ten days of purchase.
Shares acquired between 6/4/65 and 5/4/82 are valued at the market value on 31/3/82. When they are sold, two calculations are required. This is the same as the calculation for other assets held at 31/3/82. If there is a partial disposal of the shares the original costs and market value are apportioned.
Between 6/4/82 and 5/4/98 all shares were pooled. This provided a simpler environment for matching shares and for identifying the value of the current share holding.
As shares are purchased, they are pooled unless they are sold within ten days. The basic idea is that the overall value of the pool will rise by the amount spent on the shares and the total holding in the pool increase by the number of shares bought. Indexation allowance is applied to the existing share pool before adding in the new shares.
When shares are sold the total holding is reduced by the number of shares sold and the pool value decreased in proportion to the number of shares sold. Indexation allowance is applied to the pool before removing the shares sold.
For example 1,000 XYZ shares are purchased in February 1995 for £3,500, a further 500 shares are purchased for £2,000 in June 96. There is a disposal of 800 shares in January 1998 for £4,000. (RPI factors: Feb 95 146.9, Jun 96 153.0, Jan 98 159.5)
Shares Indexed Unindexed
|
Feb 95 Purchase Indexation to Jun 96 Jun 96 Purchase
Pool value at Jun 96 Indexation to Jan 98
Jan 98 Disposal
Pool value at Jan 98 |
1,000
500 -------- 1,500
-------- 1,500 -800 -------- 700 |
3,500.00 145.34 2,000.00 ------------ 5,645.34 239.83 ------------ 5,885.17 -3138.76 ------------ 2,746.41 |
3,500.00
2,000.00 ------------ 5,500.00
------------ 5,500.00 -2,933.33 ------------ 2,566.67 |
The gain on the disposal will be £861.24 (£4,000 proceeds minus £3,138.76 pool value of 800 shares).
It is necessary to retain both the indexed and the unindexed values of the pool because a loss may only be claimed where the proceeds fall below the unindexed value. The indexation allowance may not create or augment a loss.
Example where indexation cannot create a loss: if the 800 shares in the example above had been sold for £3,000 the gain would have been £Nil. The proceeds £3,000 are less than the indexed pool value of £3,138.76 but are still more than the unindexed value of £2,933 so there is no gain/no loss.
Example where indexation cannot augment a loss: if the proceeds fall below the unindexed value of the shares a capital loss will arise. For example, if the 800 shares in the example above are sold for £2,500, there will be a loss of £433.33 (£2,500 proceeds minus unindexed value of £2,933.33).
A bonus issue, scrip issue or stock split is an acquisition of shares without costs. A bonus issue may be entered in relation to shares in the FA85 share pool. IRIS cannot compute the effect of a bonus issue on 1982 holdings or shares acquired after 5/4/98. The bonus issue has the effect of diluting the value of the shares.
For example, 1,000 shares are acquired in July 1994 for £5,000 and there is a 1 for 4 bonus issue in September 1996. (RPI factors: Jly 94 144.0, Sep 96 153.8)
Shares Indexed Unindexed
|
Jly 94 Purchase Indexation to Sep 96 Sep 96 Bonus issue
Pool value at Sep 96 |
1,000
250 -------- 1,250 |
5,000.00 340.28 0.00 ------------ 5,340.28 |
5,000.00
0.00 ------------ 5,000.00 |
In IRIS, where a bonus issue relates to a 1982 holding, the holding should be edited to add the extra shares. Similarly for post 5/4/98 acquisitions affected by a bonus issue, edit the holding for each acquisition to include the bonus shares.
A rights issue is an option to purchase share based on the existing holding, in effect identical to an acquisition of shares. As with bonus issues, IRIS can calculate the effect on an FA85 share pool but not on 1982 holdings or post-5/4/98 acquisitions. In these last two cases, enter the rights issue as an acquisition.
For example, 1,000 shares are acquired in July 1994 for £5,000 and there is a 1 for 4 rights issue costing £1,000 in September 1996. (RPI factors: Jly 94 144.0, Sep 96 153.8)
Shares Indexed Unindexed
|
Jly 94 Purchase Indexation to Sep 96 Sep 96 Rights issue
Pool value at Sep 96 |
1,000
250 -------- 1,250 |
5,000.00 340.28 1,000.00 ------------ 6,340.28 |
5,000.00
1,000.00 ------------ 6,000.00 |
A rights issue is in effect the same as an acquisition of shares purchased in the normal way.
In most cases shares are paid for in a single transaction. Where the payment is made in instalments the payment is deemed to have been made on the initial purchase date unless the instalment is more than one year after the initial purchase date.
For example, if shares are purchased in October 1994 for £1,000, with a second instalment payable in September 1995 of another £1,000 and a third instalment payable in August 1996 also of £1,000; the whole £3,000 will be deemed paid in October 1994 and indexation allowance applied accordingly. If the instalments had been more than a year apart, each instalment is indexed separately.
For example, 1,000 shares are purchased in October 1988 for £1,000 and a second instalment also of £1,000 is paid in December 1989. (RPI factors: Oct 88 109.5, Dec 89 118.8)
Shares Indexed Unindexed
|
Oct 88 Purchase Indexation to Dec 89 Dec 89 Instalment
Pool value at Dec 89 |
1,000
0 -------- 1,000 |
1,000.00 84.93 1,084.93 ------------ 2,084.93 |
1,000.00
1,000.00 ------------ 2,000.00 |
In IRIS, the instalment option should be used only when the instalments are more than one year from the date of purchase.