CGT and the 30 day rule

bowlhead99

EnglishMohican wrote: »

My question is very hypothetical to make the maths simple for me but the basic situation must be possible if I have understood what has been said so far.

In Year 1, I buy 5140 shares at £40.57 each. In year two, I buy 2860 more of the same shares at £52.37 each. The section 104 average cost is £44.79.

OK, agreed. If you sell any shares now, without buying any more, each share you has will be considered to have cost you £44.79 each. Because all the 8000 shares are indistinguishable from each other, they are just sitting in a big bucket called 's104 holding'.

When you sell one share you will pick it at random from the bucket and know that it cost £44.79. It is impossible to tell whether the specific share you are selling might have originally cost £40.57 or £52.37, because - just like having a bucket of 8000 paperclips that was constantly refilled from 2 or more purchased batches - you don't know or care what what an individual one cost, so you say they all cost, on average, £44.79

In year 3 I sell 2860 shares unfortunately for exactly the price I paid for them (£52.37) and make an apparent capital gain of £21690.17 (2860 *( 52.37-44.79) ) on which I pay tax.

OK, makes sense, you are selling a pile of shares which cost on average 44.79 each, for more than 44.79 each, so there's a gain. You have it right so far.

In year 4 I sell the remaining 5140 shares and the stock market has collapsed so I sell them for £40.57 each - the original price I paid for them. Now I make an apparent capital loss of 21690.17 (5140*(40.57-44.79)).

OK, so now you are selling shares that, on average, had cost 44.79 each, and you are only getting 40.57 for them. Clearly a loss has been made.

Have I understood the process correctly and done the sums correctly

I didn't put them all in calculator to double check but yes the method was correct.

and in year 4, can I go to HMRC and ask for the tax that I paid in Year 3 back - as in fact I have made £0 gain overall.

No you can't. You made profits on selling some of your shares at over £50 each when on average you had paid under £50 for the shares. So, a profit was made and tax was due because HMRC wants to tax profits. Although of course they are nice people and gave you an annual exemption in year 3 against your total profits, and don't charge you as high a rate on capital gains as they charge you on earned income, because they want to encourage investment.

Now you are saying you held on to the rest of your shares until the market fell heavily. That's not HMRC's fault. You have made some losses. You can't go back and say "Oh but I paid tax in the past, can't I get it back". The answer is No. You can carry the loss forward and knock it off gains you make in the future.

It's a bit like if I earn £60k one year from my job and pay high 40% tax on some of it, and then the next year I only earn £20k, I can't go back and say "ooh but on average I only earned 40k a year which is below high rate tax band so can I have the high rate tax back please.". Answer is no.

I believe I can count the loss in year 4 against any gain I made in the same (and subsequent) years

Yes, you can.

but if they were my only shares ever, can I have (effectively) the tax back as cash.

No.

talexuser

bowlhead99 wrote: »

we have been tracking the overall average price of the pool as we add cost when buying and remove cost when selling.

Thank you for the clear explanation. So we add up the total cost of the shares over a tax year (minus costs) and divide by the total number of shares to arrive at the average price.

And that figure is then the start figure in the next tax year for any remaining shares.

ColdIron

The tax year has nothing to do with it, the cost is the cost regardless of when they were acquired

bowlhead99

ColdIron wrote: »

The tax year has nothing to do with it, the cost is the cost regardless of when they were acquired

Yes, although Talexuser gave the details year by year, in reality you could/should update your total costs of the 'pool' of shares every time you add shares into the pool, to ensure that if you were to sell any of the shares tomorrow you would already know exactly what the total pile of shares cost and therefore what each individual share must cost on average, for purposes of the disposal calc.

If you get two or three or four purchases in a row with no sales, you can of course wait until those four events have happened before updating your overall cost / overall average cost calculation right before doing the next sale. But as that exercise will involve pulling out the documentation with details of all the three or four purchases on the various dates, it can be easier to just do it in real time every time there's a purchase (including a dividend reinvestment) so that your info is always up to date.

talexuser

ColdIron wrote: »

The tax year has nothing to do with it, the cost is the cost regardless of when they were acquired

Understood, thanks. My assumption was using up as much as the CTG limit each year on gains as you can, so eventually you can cash in as much as you like with the minimum CTG owing.

ColdIron

Ah I see. To be clear you are not using your annual £11,100 CGT allowance when you buy your shares even if you buy them over many years. It can only be used in the tax year that you sell them. Then you have the interesting problem of what to do with the sale proceeds to avoid running foul of the 30 day rule unless you are happy to stay out of the market

talexuser

Yes, thanks, I decided in the end to buy an equivalent fund for 31 days, or just keep it instead, depending on feelings about performance etc.