The share matching rules are an important element of capital gains tax (CGT) calculations. Note that this doesn’t apply to dividends, which are subject to income tax instead.
But they can appear complicated. For example, if you sell 500 shares out of a holding of 2,000 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? What’s the taxable gain? And how do you calculate it?
Let’s break it down.
The CGT 30-day rule explained
The share matching rules determining which shares have been sold for capital gains tax liability 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)
Let’s go through each one and explain their importance when filing an UK annual tax return.
Note that any shares held within a tax-efficient account like an ISA or SIPP are not included in these three categories as they are exempt from capital gains tax. However, these accounts are still subject to stamp duty when buying stocks and may be subject to inheritance tax, depending on the situation.
Related: Guide to Avoiding Capital Gains Tax on Shares
Furthermore, 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.
Preventing bed-and-breakfasting
Steps 1 and 2 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 CGT exemption. Then the 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. It was a clever trick to minimise an investor’s tax liability.
Since the rules on bed-and-breakfasting were changed back in 1998, it’s no longer possible to undertake this specific type of transaction to minimise CGT liability. However, it is often good practice to utilise an annual CGT allowance wherever possible. Several similar ideas may still be of use (such as selling shares outside of an ISA and then re-buying within an ISA — known as bed & ISA).
Further changes in 2008 to the way CTG tax relief was calculated (namely, the abolition of taper relief and indexation) meant the length of share ownership was 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. This is called the Section 104 holding.
Related: How Much is the Capital Gains Tax rate on Shares?
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 the capital gain on the sale of shares at the end of the tax year, you only need 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. The value of the Section 104 is reduced to £3,750, and the average price remains £2.50 per share.
Suppose any shares were held at 31 March 1982. In that case, 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 a gift, they will pass at the market value at the 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 regarding what to do in these instances.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.