Capital Gearing Share Discussion Threads

[miata] 28/2/2012 13:49

No. It is up to you to decide what [reasonable] accounting method to choose, which could include monthly average rates for share buys and sells.

This is a complex subject and requires you to do some detailed research.

[tehmac] 28/2/2012 13:36

Ah I see. So the monthly average exchange rates is purely for the currency conversion of money being credited and debited in my account between USD and GBP, and not directly related to my share buys and sells.

For my share buys and sells which will all occur in USD, I still record them as normal and take note of the conversion rate at that point in time for my records.

In effect, two different approaches I will need to take.

[miata] 28/2/2012 12:46

More on the option to use monthly average exchange rates (paragraph 14 et seq):



Example:

[tehmac] 28/2/2012 11:37

Thanks Gengulphus, that helps. I'll probably need to digest that some more and see if I have more questions relating to that. Are you familiar with the CGTCalculator.com site and their format for recording your trades for use in their system?

It goes like this (if you assume an excel sheet with 7 columns):

B/S (Buy or Sell) Date Company Shares Price Charges Tax
S 27/2/12 TRP 92332 0.0299 12.5 0

1). My query is, how would I log the currency side of things in this format for their system when converting back and forth GBP to USD and USD to GBP in my account (not when buying or selling shares). I'm trying to make this as simple and least confusing as possible.

2). My other confusion arose when MIATA was talking about monthly average exchange rates which was making me think I was able to use one average exchange rate for all my buys and sells during that month, rather than the above example you gave where I simply record what the exchange rate was at the point of buy or sell and log that. I'm not sure what the pros and cons of each are, or even if that was what MIATA was meaning.

Thanks.

[gengulphus] 27/2/2012 21:07

tehmac,

Let me give a made-up example, in the hope that it helps. Imagine the following sequence of events - where I've left out spreads, commissions, etc, in order not to get bogged down in detail:

1) Transfer £20,000 to your USD account, at a time when the exchange rate is $1.60. You now have $32,000 in the USD account.

2) Buy 2,000 shares in a company for $8.50 each, at a time when the exchange rate is $1.70. You now have 2,000 shares and $15,000 in the USD account.

3) Sell 1,000 of those shares for $12 each, at a time when the exchange rate is $1.50. You now have 1,000 shares and $27,000 in the USD account.

4) Transfer $16,000 back to a GBP account, at a time when the exchange rate is $1.60. You now have 1,000 shares and $11,000 in the USD account.

Your GBP account is down an overall £10,000 on the sequence of events.

As far as the shares are concerned, the corresponding CGT calculation goes:

1) Nothing happens to the shares.

2) You have just acquired a Section 104 pool of 2,000 shares bought for $17,000/$1.70 = £10,000.

3) You have just disposed of half of that Section 104 pool (i.e. 1,000 shares bought for £5,000) for £12,000/$1.50 = £8,000, and so have realised a capital gain of £3,000. Your remaining Section 104 pool is the other 1,000 shares, with a base cost of the other £5,000.

4) Nothing happens to the shares.

As far as the currency holding of USD is concerned, the corresponding CGT calculation goes:

1) You have just acquired $32,000 for a cost of £20,000.

2) You have just disposed of 17/32nds of that holding ($17,000 with a cost of $10,625) at a value of $17,000/$1.70 = £10,000. You have therefore realised a capital loss of £625. Your remaining holding is $15,000 with a cost of £9,375.

3) You have just acquired an additional $12,000 at a value of $12,000/$1.50 = £8,000, so your holding is now $27,000 with a cost of £17,375.

4) You have just disposed of 16/27ths of that holding ($16,000 with a cost of $10,296) for £10,000. You have therefore realised a capital loss of £296. Your remaining holding is $11,000 with a cost of £7,079.

Net result: you have realised a capital gain of £3,000 on the shares and two capital losses totalling £921 on the currency, for £2,079 net gains. You're carrying forward holdings of 1,000 shares with a cost of £5,000 and $11,000 with a cost of £7,079.

Does that example help? If not, can you give an alternative example sequence of transactions (not too complicated or long, please!) that you think would help?

By the way, a useful check on the whole set of calculations is that the total cost of the holdings you're carrying forward (£5,000 + £7,079 = £12,079) is the same as the net cost to you in GBP plus the net gains you've realised (£10,000 + £2,079 = £12,079).

Gengulphus

[tehmac] 27/2/2012 17:10

I don't understand how that process would work. How can I revalue everything if I still have shares that are bought and I haven't sold for a profit or loss. What do I do with said figure.

If you are talking about just looking at my cumulative balance in USD (which includes shares that I am currently in and have not realised a profit or loss in) and converting that into GBP (not literally), then what do I do with that figure on a month to month basis? If I was only doing that then there is no need to record all my individual transactions.

[miata] 27/2/2012 16:44

Incorrect, on conversion you would realise a (potentially taxable)gain or loss.
The accounting norm would be to revalue everything monthly if that was the method you chose.

[tehmac] 27/2/2012 16:29

Thanks, that makes things clearer. My broker/platform will be dealing in USD for buys and sells (which I will log on my spreadsheet), and later at the end of each month I will be adding the exchange rate average for that month to each buy and sell to get the GBP figures I will need to use for CGT. Those are the figures I will be giving to HMRC.

As far as I can understand it, after I have done the above, if I then decide to convert my full balance back to GBP from USD, and I take a hit or make a gain due to the exchange rate change from the time of my initial conversion into USD, then that's just the way it is. This change itself does not need to get logged in any way?

[miata] 27/2/2012 15:50

1)Yes. 2)No.
All realised profits/losses need to be declared. If you have a cash element that you have not withdrawn then you have not realised a profit or loss on the cash element if you have chosen to convert every transaction, rather than monthly, quarterly or annual revaluations.

[tehmac] 27/2/2012 15:32

MIATA: Not what I was asking before. This time I am asking whether I need to declare all profits/losses I have made in the US markets if I still have my balance in USD at the end of the year and I have not withdrawn/converted anything back. Do I only need to declare anything that has been converted back into GBP and withdrawn from my account?

[miata] 27/2/2012 15:04

Previously asked and answered 184 et seq.

[tehmac] 27/2/2012 14:04

I have just been reading this, and I am rather confused. I am investing in US markets, and I convert my GBP balance to all USD. Am I supposed to take into account all transactions I have had during that year? It seems as if that article is saying that I don't need to record the information for that years CGT unless I have converted it back to GBP. If I was to leave it all in USD in my account for an entire year, I don't need to record anything for that tax year? I can imagine that becoming very confusing when it comes time to convert 'x' amount of my USD back to sterling, because I wouldn't know which share transactions to record for that particular amount I am converting/withdrawing. It could be shares I bought and sold months prior.

Where is my thinking flawed?

[sturmey] 26/2/2012 19:43

I am shocked to discover someone on here who does not know that Microsoft Excel is not an essential tool for making money! I, for one, gravitated a while ago to "Openoffice" which is fully compatible with Word, Excel etc.

I run Openoffice on both PCs and Macs. I exchange files with users who only have Microsoft Office. Also, I use with "Numbers" and "Pages" on ipad which does not support Openoffice (memory constraints?). But no problem since mu ipad can open openoffice files.

[miata] 26/2/2012 19:21

I am shocked to discover someone on here that doesn't find an Excel type spreadsheet an essential tool for making money, but there are alternatives like Star Office that are similar and free.

[hectorp] 26/2/2012 19:09

I'll have a large Loss to report during the present year ending soon. Can I find a free software package that the revenue will accept, that links my Waterhouse account details to the tax form ( online?) anyone. Waterhouse says it can be downloaded to Exel but I can't afford Exel.
H.

[1144523] 25/2/2012 22:35

Gengulphus,

All of his losses were realised and I am just in the process of preparing the loss claims.

I have just re-read the HMRC advice regarding the disposals in excess of 4 x CGT Allowance. Together with your advice, the situation is now crystal clear. Part of my problem, was that I had been advised by someone quite experienced that if your disposal proceeds exceeded the CGT allowance x 4, you should request a tax return. They were wrong!

Thanks for your advice!

[gengulphus] 25/2/2012 21:52

As things stand in 2011-12 he has gains in excess of the capital gains tax allowance. However he has losses from past years which will easily reduce the gain to £10,600. I understand, from reading this board that you can write to the tax office to claim your previous year losses. That's one question answered!

Yes, provided the losses were realised:

* in the 2007/2008, 2008/2009, 2009/2010 or 2010/2011 tax years;

* in the 2006/2007 tax year provided he was not asked to complete a tax return for that tax year;

* in the 1995/1996 tax year or earlier.

If the losses were realised in the tax years from 1996/1997 to 2005/2006, or in the 2006/2007 tax year and he was asked to fill in a tax return for that tax year, he's out of luck.

In the cases that the loss was in the 2007/2008 or 2006/2007 tax years, claiming the losses is fairly urgent - the deadlines for claiming them are April 5th 2012 and March 31st 2012 respectively. Source:

A loss is "realised" when the shares are sold or otherwise disposed of. Note that if the loss occurred because the company collapsed rather than because the shares were disposed of, it may not be obvious when the loss was "realised" for tax purposes - ask again with details if that's the case.

Also note that losses can only be carried forward out of a tax year if either they were realised in that tax year and in excess of the gains realised in that tax year, or they were brought forward into that tax year from a previous tax year and not needed to take the gains realised in that tax year below the CGT allowance. For example, if your friend realised £5,000 gains and £4,000 losses in the 2010/2011 tax year, he can claim the £4,000 losses but he cannot carry them forward into the 2011/2012 tax year: they've got to be used to reduce the £5,000 gains realised in the same tax year to £1,000.

My friend has never completed a tax return but I now believe he should have completed one in 2009-10 based on the level of disposal proceeds.

That cannot be the case.

The only reason he would have been obliged to complete a tax return for 2009/2010 is if the taxman asked him to do so.

If the taxman didn't ask him to complete a tax return for 2009/2010, all he was obliged to do was check whether he had any CGT to pay for that tax year, or any Income Tax in excess of what had been deducted at source, and if either (or both) of those were the case, to inform the taxman of the fact by 5 October 2010 (six months after the end of the tax year). That obligation has a slightly tricky case to do with offset losses - if the reason why he had no CGT to pay for the tax year was because his gains were reduced to below the allowance by losses, he needs to have claimed the losses before he can say that he didn't have CGT to pay for the tax year - but not one to do with the disposal proceeds limit.

The disposal proceeds limit only applies if you have to complete a tax return: it says that if your disposal proceeds are over 4 times the CGT allowance, you have to complete the Capital Gains Summary supplementary pages for the tax return, with accompanying CGT computations. It doesn't say anything about whether you have to complete a tax return in the first place.

Net result: As long as your friend:

A) wasn't asked to complete a tax return for the 2009/2010 tax year;

B) didn't owe Income Tax for that tax year in excess of what had already been deducted at source;

C) didn't owe CGT for that tax year; and

D) didn't need to offset losses to get to that position of not owing CGT for the tax year (i.e. the gains for that tax year were below the CGT allowance without deducting losses);

he's in the clear for that tax year. If all of them except D) are the case, he needs to claim the losses for that tax year before he's in the clear; otherwise it's more complicated.

In response to your later post:

I will ask him what he wants to do. I personally, would do things by the book, even if no tax was due.

I would too, since if things haven't been done properly, fixing them up can only get more difficult as time goes by.

But don't think of exceeding the disposal proceeds limit in 2009/2010 as a failure to do things by the book, unless he was asked to complete a tax return for that tax year and failed to obey the instructions to submit the Capital Gains Summary supplementary pages and accompanying CGT computations if the disposal proceeds limit was exceeded.

Gengulphus

[1144523] 25/2/2012 11:17

Thanks for the response MIATA.

So, if he applies for a 2009-10 return and files it there will be no penalty assuming he has no tax to pay.

If there is tax to pay (for 2009-10), he is now beyond 12 months late (31 Jan 2011) so the penalty would be a minimum of 10% or 20% of the tax due, depending on whether there was deliberate concealment.

I have this feeling he started loaning money out around that time, and received untaxed interest so he might have to pay a penalty, based on that. If so his penalty could be up to 30% of the tax due, provided the failure to notify was not deliberate.

I will ask him what he wants to do. I personally, would do things by the book, even if no tax was due.

Cheers

[miata] 25/2/2012 10:15

You don't need to report your gains if all of the following conditions are met:
You have no Capital Gains Tax to pay.
Your total gains (before you deduct any losses) are equal to or lower than the annual tax-free allowance (£10,100 for 2010-11 for individuals. £10,600 for 2011-12)
Your total 'disposal proceeds' - usually the amount you receive when you sell or dispose of an asset - are no more than four times the tax-free allowance (that is no more than £40,400 for individuals in 2010-11 - £42,400 for 2011-12).
You're resident and domiciled in the UK (usually this means that you live here and your permanent home is here).

From your information I suggest he would qualify for a fine for not completing a tax return [for 2011-12] and as losses from prior years must be claimed and there are time limits for doing this, the losses might in due course become ineligible and thus his gains taxable.

No penalty is due for failure to notify unless there is tax or duty unpaid because of the failure. If a person makes a full and unprompted disclosure within 12 months of becoming liable for a failure to notify penalty, it can be reduced to zero.

[1144523] 25/2/2012 00:55

Hi guys,

I wonder if you could help...

I have just finished preparing some tax computations for a friend. Up until now he did not make much from investing, but a recent disposal has made him worried he would be liable to pay tax.

As things stand in 2011-12 he has gains in excess of the capital gains tax allowance. However he has losses from past years which will easily reduce the gain to £10,600. I understand, from reading this board that you can write to the tax office to claim your previous year losses. That's one question answered!

My friend has never completed a tax return but I now believe he should have completed one in 2009-10 based on the level of disposal proceeds.

I have spoken to a couple of people who think there is no point registering to file a tax return in these circumstances. Their argument was, that even if HMRC did find out, there would be no tax due. I could file his return at no cost so that would not be an issue.

So in summary, my question is, should he ask for 2009-10 & 2010-12 tax returns? I have detailed the important info below.

I would be grateful for any advice.


2009-10:
Disposal Proceeds = £48,929.00

2011-12:
Disposal Proceeds = £69,407.00
Allowable Costs = £58,750.00
Year Gains = £11,040.00
Year Losses = £383.00

[sir rational] 24/2/2012 13:40

MIATA - O/T

[sludgesurfer] 23/2/2012 11:27

Thanks again,

I think I'll lay low. I've kept decent records of the losses and saved the CGTcalculator.com output. I'm surprised that I have never been asked to fill out a tax return as well. I seem to remember having asked HMRC by phone in the past whether it is necessary and the response was that they'd tell me when it was time to fill one in.
Perhaps because my bonus sacrifice payments into my SIPP normally take my taxable income to within £10-20k of £100k they don't take an interest.

Regards,

Sludge

[miata] 23/2/2012 07:28

I don't believe there's much point in delaying "claiming" the losses.

The point was avoiding contact with HMRC and avoiding the need to fill in a tax return deemed "somewhat masochistic".

[gengulphus] 22/2/2012 20:07

sludgesurfer,

-Is it necessary to inform HMRC before 5th April or I will 'lose' the ability to offset these losses against future gains, or can I inform them of historic losses after the tax year in which they occurred?

You can "claim" losses up to the end of the 4th tax year after the tax year in which they were realised. So no, there's no immediate urgency about letting the taxman know about them.

If you have to fill in a tax return for the year concerned, don't declare them in that tax return, and yet "claim" them later, you might have a bit of explaining to do. It's not difficult to explain, though, provided you didn't meet any of the criteria for having to detail your capital gains and losses - basically, you just didn't realise that you wanted to "claim" the losses.

However, as you don't have to fill in a tax return, that probably doesn't apply to you. I'm more than a bit surprised - I would expect just about anyone with an income of £100k+ to have to fill one in - but basically, whether you're required to fill in a tax return is a matter between you and the taxman.

Having said all that, I don't believe there's much point in delaying "claiming" the losses. It doesn't make the slightest difference to when or how the losses are used; all it does is increase the amount of backtracking that might be required through your tax affairs, and the risk of forgetting to "claim" them until it's too late... So personally, I would wait only until it becomes completely clear what your 2011/2012 losses are (probably May 6th to take account of the 30-day rule) and get the claim in.

Gengulphus