How does CGT work?

Londonlisa12

If i bought eg £50K of a fund in 20/21 then £50k of the same fund in 21/22 and then in 5 years time the initial £100k was valued at £130K and i decided to sell £40k all held in the same platform on which buying price is CGT calculated?
Thank you.

bowlhead99

Effectively it's a weighted average of the first and second share prices.

But basically you have shares worth £130k and want to sell £40k-worth of them.

You would be therefore be selling 40/130ths of the investment shares, and you know all of the investment shares together had cost you £100k.

The buying cost of the 40/130ths that you are selling, was 40/130ths of your total £100k purchase price.

In other words, if all of the shares (130/130ths of the shares) had cost £100k; but you are only selling 40/130ths of the shares, you must be selling shares which had cost you 40/130ths of £100k = £30.77k

Selling shares for £40k of proceeds, when they had originally cost £30.77k, is a capital gain of £9.33k.

You mention 'all held in the same platform' but it doesn't matter if they are all on the same platform or on different platforms. If the shares are all in the same company or all in the same class of the same fund, and are outside a pension or ISA, then they are all considered to be part of the same pool of shares with one average cost per share at the point you sell some of them.

Londonlisa12

Thank you very much for taking the time and trouble in posting the answer to my question.

talexuser

Also you can deduct the buying and selling costs (including any stamp duty) so not effectively paying CTG on the dealing charges. So your example would be 100k without the 2 lots of buying costs and 130k without the seling cost.

TBC15

bowlhead99 wrote: »

Effectively it's a weighted average of the first and second share prices.

But basically you have shares worth £130k and want to sell £40k-worth of them.

You would be therefore be selling 40/130ths of the investment shares, and you know all of the investment shares together had cost you £100k.

The buying cost of the 40/130ths that you are selling, was 40/130ths of your total £100k purchase price.

In other words, if all of the shares (130/130ths of the shares) had cost £100k; but you are only selling 40/130ths of the shares, you must be selling shares which had cost you 40/130ths of £100k = £30.77k

Selling shares for £40k of proceeds, when they had originally cost £30.77k, is a capital gain of £9.33k.

You mention 'all held in the same platform' but it doesn't matter if they are all on the same platform or on different platforms. If the shares are all in the same company or all in the same class of the same fund, and are outside a pension or ISA, then they are all considered to be part of the same pool of shares with one average cost per share at the point you sell some of them.

I get £9.23k

bowlhead99

TBC15 wrote: »

I get £9.23k

Yes, if you do the maths correctly, you will.

If you do it quickly in your head like me, you'll be out by £100

TBC15

I tried doing it quickly in my head, woke up with a crowd around me.:D

JuniorG

I hope it’s ok to jump on this thread with a couple of related questions on this topic:

1) When you enter the next tax year, do you re-calculate the average, assuming you have now sold the oldest shares, or do you carry forward the blended average (minus the blended cost of what you sold)? I.e. do you always have to keep a running spreadsheet of all transactions over time?

2) I have a pool of shares going back 5 years, and still being added to through a company scheme. A broker told me that if I sell new shrares within 30 days I could consider them separate from the pool. After 30 days they go into the pool. I can’t find anything online to back that up though. Is it true?

Many thanks.

bowlhead99

JuniorG wrote: »

1) When you enter the next tax year, do you re-calculate the average, assuming you have now sold the oldest shares, or do you carry forward the blended average (minus the blended cost of what you sold)? I.e. do you always have to keep a running spreadsheet of all transactions over time?

You don't recalculate the average cost of your shares simply because you go into a new tax year.

If I have a pool of shares today which had cost me, on average, £1.333 (for example I had historically bought 100 shares at £1 and 50 shares at £2; £200 cost spread over 150 shares is £1.333 each).

I can sell some of those shares tomorrow (say, 25 of them) and the ones that I don't sell, have still cost me an average of £1.333. Let's say I have 125 shares that I didn't bother to sell. They'll stay in my pool of shares.

In a little less than three months time, it will be 6 April 2020 and we are in a new tax year. So what. That doesn't change the fact that the 125 shares had cost me £1.333 each. Why would I recalculate anything?

I am always carrying forward the average cost of shares that I hold so that I can use that cost of shares if I sell any of them.

If I had 125 shares left at a point in time, with an average cost of £1.333 each (total cost £166.67, and then I buy another 50 shares at £2.50 each(£125); my total cost of the 175 shares is £291.67, so from that point onwards my average cost per share is £1.67.

As you can see, buying new shares and adding them to the pot (even if they are held by different brokers) will change the average purchase price of the shares you hold. Whereas selling some of the shares will not change the average purchase price of the shares you didn't sell. And moving from one tax year to another, doesn't change anything in terms of the average price paid for the shares.

If you want, you can keep a spreadsheet maintaining at all times a proof of the average price of the shares that you hold at a point in time, so that it is always available if you sell something.

If you don't want to do that, then every time you sell something you will have to keep going back to the beginning of time and proving what you bought and sold when, to get to the current point, which will be a pain.

2) I have a pool of shares going back 5 years, and still being added to through a company scheme. A broker told me that if I sell new shrares within 30 days I could consider them separate from the pool. After 30 days they go into the pool. I can’t find anything online to back that up though. Is it true?

Perhaps you misunderstood what the broker said or the broker misunderstood what you had asked.

There is a '30 day rule' to avoid people trying to 'beat the system' by selling shares to crystallise a tax gain and then immediately buying back the same shares (bed and breakfasting)
https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51560

What happens is that any shares you ever sell will first be matched with the purchase price of the shares you bought that same day or within the NEXT 30 days after that sale date... that matching the next 30 days is done first as a priority to matching the sold shares to anything in your big existing 'pool' of shares.

So in my example above, if today I have 150 shares with an average price of £1.333 each, and then tomorrow I sell 25 shares for £2.10 each...

If I didn't buy any back in the next 30 days, the cost of those sold shares is just the £1.333 each.

But if next Friday I went back to the stock market and bought 10 of the same type of shares at £2.15, 10 of the 25 shares sold on Monday are matched with the 10 bought Friday, so only 15 of them will be matched with the ones in my existing pool of shares at £1.333 each. So my CGT calc will be a little more complicated, bringing in some shares bought at £2.15 and some shares costing an average of £1.333.

If you avoid purchasing the same shares within 30 days of selling them, you avoid any complexity of these rules. When involved in a company share scheme you may be buying new shares from time to time, and you might be buying them at a discount. It is therefore being aware of the 30 day rule so that you don't think you are selling old shares at a loss or a small gain with no CGT consequences, and then a fortnight later you buy a bunch more shares through the company scheme at a big discount, and actually the cheap later-bought shares are matched with the sold shares creating a bigger gain you expected.

So, that's the 30-day rule. It is to do with buying shares in 30 days *after* you sell them. It's not about buying shares 30 days *before* you sell them.

If you or the broker think you can buy shares and sell them quickly within 30 days and not bother to consider them as part of your existing 'section 104 pool' of shares, that seems to be flat out wrong.

There is a separate rule which might be being mixed up here. If you have shares coming out of a maturing approved company share scheme (eg sharesave), and you have capacity in your annual ISA subscription limit, you can put those shares directly into an S&S ISA within 90 days (as many of them whose market value wouldn't exceed your remaining ISA allowance). So, if you act quickly you could avoid mixing them in with your other 'section 104 pool' of existing shares by moving them directly to an ISA. In an ISA you can then sell shares without CGT issues.

But that's a rule about avoiding CGT issues aby moving quickly to an ISA rather than by selling quickly; and is 90 day rule not 30 day rule.

JuniorG

Thank you for such a detailed reply bowlhead99, it’s much appreciated.

On point (1) I was’t sure which way to do the calc, as in your example: If I buy 100 shares at £1, then 50 shares at £2, as you say the average is £1.33 per share (150/200). If I sell the first 25, then the average of what I have left is actually £1.4 per share (175/125). I think what you’re saying is that, even if I can physically sell the first 25, it doesn’t count as such for tax purposes. I should always carry forward the remaining pooled value and not recalculate the value based on what I specifically have left. Many thanks for this, I will keep my spreadsheet running.

On point (2), yes many thanks, that matches everything I researched to. If that’s what my broker meant, he certainly didn’t explain it that way, but you've told me something new about moving shares into an ISA, that I will look into.

Thanks for this, it's really helped.

[Deleted User]

bowlhead99 wrote: »

If I had 125 shares left at a point in time, with an average cost of £1.333 each (total cost £166.67, and then I buy another 50 shares at £2.50 each(£125); my total cost of the 175 shares is £291.67, so from that point onwards my average cost per share is £1.67.

As you can see, buying new shares and adding them to the pot (even if they are held by different brokers) will change the average purchase price of the shares you hold. Whereas selling some of the shares will not change the average purchase price of the shares you didn't sell. And moving from one tax year to another, doesn't change anything in terms of the average price paid for the shares.

Bowlhead99 - Thank you very much for this reply. I been wrecking my head trying to work out what happens in this scenario. Can I just make sure I understand it correctly as I think I may have understood it differently from what I been reading.

I was under the impression that when you sell units, you use the average price. In your example, it's £1.333. However, any remaining units (unsold) remain with that same average price ie fixed until sold completely. But what you are saying is that if I then were to buy new units, this will alter the average price for what is then the total holding. ie the remaining units after the sale plus the new units. In your example, the new average price becomes £1.67.

So does that mean that when you do a further sell of the carried forward units which were originally valued at £1.333, you then use £1.67 as the average purchase price.

I'd be very grateful if you can clarify this for me.:)