Capital Gearing Share Discussion Threads

[david77] 25/11/2013 08:17

Send a letter to your broker saying that you are 'gifting' these shares to your spouse and they should do it - that assumes that you both have accounts with the same broker.

My broker insisted that I included the words "gifting" or "making a gift of".

[ryan83] 24/11/2013 22:38

Does anyone know how long it takes to transfer shares to a spouse?

[gengulphus] 24/11/2013 11:30

Investoree,

So if I understand you correctly:

* You currently have net realised capital gains outside the ISA that are within your CGT allowance - i.e. you're currently basically in the right CGT situation for the current tax year.

* Selling the PVCS holding you have outside the ISA will realise a big capital loss, which would substantially reduce those net realised gains or even turn them into net realised losses, worsening your CGT situation for the current tax year significantly.

* You have other shares outside the ISA with big unrealised gains on them, that you could sell to realise those gains. Selling the right amount of them would cancel out the PVCS losses and so would restore your CGT situation to about what it was - but you don't want to sell those shares.

Is that correct?

If not, then ignore the rest of this post and say how it's incorrect, please.

If it's correct, then:

* First off, you're not forced to do any of the selling. The apportionment calculation I described sounds messy, I know, but it isn't that difficult. The main problem with it is just that the exact share price to use in it is the price at the end of November 27th, which of course isn't yet known.

* Going down from net realised gains just within the CGT allowance to much lower ones or even net realised losses costs you a maximum of the higher CGT rate (28%) times the CGT allowance (£10,900), or £3,052, in future CGT. It doesn't cost you anything immediately - and it may be that you can postpone that cost for quite a long while by good CGT planning (or even forever - if you postpone it until your death, the potential future CGT goes away completely). I realise of course that £3,052 is quite a lot of money, but given that your earlier post talked about a £50k loss and that your gains and losses are big enough to make CGT planning an issue, it's clearly not that large a sum compared with the amounts of money you're working with... At which point, I'll bring out the old saying "Don't let the tax tail wag the investment dog!". Try to get rid of the tax problem, yes, but keep it in proportion - so don't regard the tax problem as forcing you to do things you have good investment reasons not to want to do.

* On the sale of the PVCS shares outside the ISA, taking the capital option will reduce the loss significantly compared with selling them entirely. E.g. suppose you have 65k shares bought 5 years ago at 100p each, and you sell them all at the current share price of 13.88p. Ignoring trading costs for the sake of simplicity, that realises a loss of 65k * (100p - 13.88p) = £55,978.

If you instead keep the shares, then assuming the current share price remains essentially unchanged, your holding is worth 65k * 13.88p = £9,022 until overnight between the 26th and the 27th, at which point it becomes a holding of 65k B shares, worth 65k * 7.25p = £4,712.50, and a holding of 25k Ordinary shares, worth the remaining £9,022 - £4,712.50 = £4,309.50 (*). If the price then continues to be essentially unchanged throughout the 27th, the base cost of the original shares will then be split in proportion - i.e. £4,712.50/(£4,712.50+£4,309.50) = about 52.23% of the base cost goes into the B shares and £4,309.50/(£4,712.50+£4,309.50) = about 47.77% of the base cost goes into the new Ordinary shares. Or more precisely, the £65,000.00 original base cost splits into £33,951.73 for the B shares and £31,048.27 for the new Ordinary shares. The redemption of the B shares for £4,712.50 then realises a loss of £33,951.73 - £4,712.50 = £29,239.23 - not much more than half the loss realised by a complete sale (and in fact, the proportion is the same 52.23% as applied to the split of the base cost).

Of course, it's very unlikely the share price will remain essentially unchanged over the next few days, so don't treat those figures as precise. But you can reasonably safely reckon you can nearly halve the unwanted loss by taking the capital option, compared with selling the shares. (The income option will produce £4,712.50 more income than the capital option, and a loss that is £4,712.50 bigger - both undesirable in your situation, so we can dismiss that one. With the proviso that the income option might give you the chance to realise the loss next tax year rather than this one - but I wouldn't bet on it, and it won't be under your control.)

As reducing the loss will make finding compensating gains easier, I think it's well worth getting your head around the calculation. So in your position, I would take the capital option, wait after November 27th so that I can work out what the loss is, and then look for compensating gains.

* On realising compensating gains, don't forget that there are ways to do it without ceasing to own the shares for any significant length of time. If you're married or have a civil partner, you sell the shares and your spouse or civil partner buys them at the same time. Otherwise, you sell the shares outside your ISA and buy them inside at the same time; if you don't have enough cash inside the ISA and cannot put it there with a subscription to the ISA, you do the reverse with a different share.

Do make certain that the trading costs are small compared with the potential CGT savings, though! For such manoeuvres, you generally want shares that have experienced large percentage gains (or losses if you are doing it to realise losses, in other circumstances) and that have a small spread.

Gengulphus


(*) Which implies the share price rises to 17.238p overnight between the 26th and 27th. That's quite a noticeable rise compared with 13.88p, which may seem at odds with the consolidation being aimed at keeping share price parity - the reason is that a consolidation ratio aimed at keeping share price parity at one particular price will amplify any price movement away from that price, and in the case of PVCS, the share price has risen significantly since the consolidation ratio was set.

[investoree] 23/11/2013 11:43

Thanks very much Miata and especially to Gengulphus for his prompt and detailed reply to my query. I have read and re-read the information provided many times which has unfortunately thrown up more confusion than the quandary I originally started off with.

This has all turned out to be a real mess following my engagement with the PVCS board trying to encourage them to use some of the surplus cash in a share buyback program. They point blank refused my request claiming that it wasn't in the interests of all shareholders who had to be treated equally. Therefore as a result my long term non ISA PVCS shareholding will probably have to be sold in its entirety against my wishes on Monday to avoid having to make complicated calculations that are clearly beyond my capabilities.

The substantial capital loss incurred will inevitably result in me having to sell a lot of other shares against my wishes in other companies to simply avoid losing the PVCS losses as they will have to be set against my existing gains currently within my CGT allowance to avoid the opportunity of utilising my CGT allowance.

Apologies for my misleading wording regarding "the reducing personal allowance" what I had intended to imply was that by reducing the basic rate tax band in order to take more people out of paying basic rate tax simply pushed more people into the higher rate band (which I am likely to be joining if I end up being paid a dividend on my PVCS shares).

[gengulphus] 22/11/2013 12:24

As MIATA says, no difference within an ISA - the ISA gets all the cash the company pays out and doesn't pay or get back any Income Tax or CGT either way. (The 10% tax credit is notional - in particular, it doesn't represent cash the company pays out as part of the scheme and an ISA cannot use it at all.)

Outside an ISA:

The decision in respect of losses outside my ISA seem quite simple and that it is beneficial to take the B shares for a capital return as receiving a substantial dividend payment will push me well inside the higher rate tax bracket (especially with the reducing personal allowance.

Not certain what you mean by "the reducing personal allowance" - the personal allowance has been increasing. It's the basic-rate band that has been reducing.

More importantly, if you're a basic-rate taxpayer, you can escape Income Tax on taking the income option until you get to the higher-rate threshold. After that, you will have tax to pay equal to 25% of the additional cash received as income, at least until you get up to the £100k income point where the personal allowance starts to be withdrawn.

CGT is more complex on such schemes. Your base cost for the old Ordinary shares has to be apportioned between the new Ordinary shares and the B/C shares you get from the scheme. This is done according to their relative values at the end of the first trading day after the splitting off of the B/C shares and the consolidation of the Ordinary shares happens - that trading day is November 27th for PVCS's scheme. You value your reduced holding of Ordinary shares at the end of that day (there's a somewhat messy way of determining the share price to use in that is strictly correct, but I've seen quite a few things saying that the closing price as published in the following day's FT is acceptable), and you value your holdings of B and C shares at 7.25p each (I assume the 7.27p in your post is a typo). If those three values are O, B and C respectively, then a fraction O/(O+B+C) of the base cost goes to the new Ordinary shares, a fraction B/(O+B+C) to the B shares, and a fraction C/(O+B+C) to the C shares.

Then:

* the part of the base cost that goes to the new Ordinary shares is the base cost you use for any CGT calculations produced by subsequent dealing in new Ordinary shares;

* the part of the base cost that goes to the B shares gets used in calculating the capital gain or loss when they are redeemed - i.e. that gain or loss is the 7.25p/share times the number of B shares, minus that part of the base cost;

* the part of the base cost that goes to the C shares is inherited by the Deferred shares when the C shares pay their 7.25p/share dividend. As the Deferred shares have no value, that means you will eventually realise a capital loss of that part of the base cost. The timing of that loss will be either when the company compulsorily redeems them, which it is entitled to do for 1 penny for the whole lot of them (not each), or when you put in a negligible value claim for them, whichever happens earlier.

The point of saying all that is that there are always CGT consequences of such schemes - a gain or loss (depending on how large your base cost is) if you take the capital option, a loss (which might happen in a selectable tax year if the company delays redeeming the Deferred shares until after this tax year's end) if you take the income option. So to work out which option is best generally involves working out the CGT consequences of the capital option, and both the Income Tax and the CGT consequences of the income option, and seeing which comes out better.

For instance, it can happen that the income option works out better for a higher-rate taxpayer, if they have large capital gains that they want to reduce. By choosing the income option instead of the capital option, they make themselves liable to pay 25% of the 7.25p/share payout as Income Tax, but their net capital gains end up lower by the amount of that dividend. As long as that reduction still leaves their net capital gains at or above the CGT allowance, that saves them CGT equal to 28% of the payout - so by taking the income option rather than the capital option, they make a net saving in tax paid of 3% of the payout.

Not saying that your decision to go for the capital option isn't right, by the way - I cannot say for certain either way, as it depends on your CGT situation. All I can say is that it might not be as straightforward as you think it is...

Gengulphus

[miata] 22/11/2013 11:12

As a general rule it makes no difference within an ISA.

[investoree] 22/11/2013 11:04

Miata or Gengulphus regarding the proposed Scheme of Arrangement for the return of capital of 7.27pence per share for PVCS PV Crystalox can you or anyone else please provide any help in deciding the most effective way to take up this offer inside an ISA. I realise that the huge capital losses that I have incurred (circa £50K) cannot be utilised within an ISA and that there is a normally a nominal 10% tax credit applied to dividends paid – what I cannot work out is which is the better return option in this case to take C class shares for the dividend return option or B class shares for the capital return – or whether it makes no difference which option I take.

The decision in respect of losses outside my ISA seem quite simple and that it is beneficial to take the B shares for a capital return as receiving a substantial dividend payment will push me well inside the higher rate tax bracket (especially with the reducing personal allowance.

There will also be a 5 for 13 consolidation to try and retain parity of the PVCS share price pre the consolidation with post price following the cash return. Any help from anyone would be grately appreciated as there is only a very limited time to make my declaration without the default cash option being automatically applied.

[optomistic] 21/11/2013 16:41

All noted Miata, your advice is appreciated.
Thank you
opto

[miata] 21/11/2013 16:34

Yes, but taking your gains and re-purchasing immediately in an ISA avoids the risk of subsequent rises (you are selling the best performers after all). I find this rotation a very effective use of an ISA. (I would otherwise have missed gains on SVT and JMAT in the 30 days).

[optomistic] 21/11/2013 16:30

I do Miata but still have some holdings out of them that need tidying up.

[miata] 21/11/2013 16:26

Use an ISA, make life simple.

[optomistic] 21/11/2013 16:03

Gengulphus

That makes it all crystal clear to me, thank you very much once again.

opto

[gengulphus] 21/11/2013 15:53

Yes - sell down to zero, leave 30 full days (*) without buying and then buy again, and the two holding periods are completely independent of each other for CGT purposes: no trade in the first one affects the second one's CGT calculations, nor does any trade in the second one affect the first one's CGT calculations.

(*) Just to be clear: that means for instance that if you sold down to zero on October 31st, the 30 full days without buying are all of November, and so the first day you can buy again and have the two holding periods be completely independent of each other is December 1st. A purchase on November 30th is on the 30th day after the sale and so does cause the 30-day rule to be used - even if it is 30 days and some hours after the sale (CGT basically never pays any attention to the time of day, just to what day it is).

Gengulphus

[optomistic] 20/11/2013 16:10

Thank you Gengulphus
My concern was that if I sold a complete section 104 holding that if I purchased some of the same stock again it would 're open' the 104 holding.
I understand from your explanation that if any purchase is done after 30 days have expired it will just be treated as a separate purchase and away from the computations of the previous section 104 holding.
Regards
optomistic

[gengulphus] 20/11/2013 15:30

optomistic,

The 30-day rule is relevant to all sales and takes second place only to the same-day rules. So if you sell some shares and buy the same type of share on any of the following 30 days, the only way you can escape the 30-day rule matching at least some of the shares bought on the following 30 days is by buying back at least as many shares as you sold, on the same day as the sale. And that's hardly an escape, because the same-day rules normally give effectively the same outcome as the 30-day rule would have done - there are some corner cases where things are different, but they're quite unusual.

In particular, no, it doesn't matter whether you thought the sale was a sale of your complete section 104 holding. That's basically because it's the share identification rules that decide which shares you are treated as having sold, not you. For example, suppose you sell your entire holding of 50k shares of some type. At the time you think of that sale as being of your section 104 holding of 50k shares, and indeed that is what the share identification rules say on what has happened so far, and will continue to say if you don't acquire that type of share again on the same day or in the next 30 days.

But if you buy say 20k shares in any of the following 30 days, the share identification rules will instantly change their mind and say "OK, that sale is now of the repurchased 20k shares under the 30-day rule, and of 30k out of the 50k shares in the Section 104 pool" - and almost the same applies if you instead buy 20k shares on the same day, the difference being that they will say "under the same-day rules" rather than "under the 30-day rule". And since the share identification rules say which shares you are treaed as having sold, it will no longer be the case that you sold your entire Section 104 holding, no matter how much you previously thought that was what you were doing...

Gengulphus

[david77] 20/11/2013 13:36

The 30 day rule will apply and both CGT calculators will get the maths right (I think!)

[optomistic] 20/11/2013 11:26

Gengulphus/Miata
In a section 104 holding if I sell the entire holdings within it does that mean that any subsequent purchase of the same stock then becomes a holding on its own right outside the original 104 holding, or does 30 days/that tax year come into it?
TIA

[gengulphus] 20/11/2013 02:59

If I have held the stock for a long time and have a section 104 (is that right?) holding and a share price figure last given for that, will that figure be the cost to my wife for those shares? (plus any extra costs incurred for the transfer)

Not certain what you mean by "a share price figure last given for that"... What is 'giving' share price figures for the Section 104 holding? And on what occasions is it doing so?

The figure that matters is not really a share price figure, but your total allowable costs on the Section 104 holding for CGT purposes - what you actually paid (or are deemed to have paid) for the shares, plus incidental costs of acquiring them (and as you indicate, of disposing of them by the transfer), plus enhancement costs in the case of a taken-up rights issue, minus any amounts to be deducted for previous uses of the simplified treatment of 'small' capital distributions, etc, etc, etc. Apart from the possibly-different incidental costs of disposal for a transfer to your wife and for a sale of the shares, it is exactly the same amount as you would deduct from the raw sales proceeds if you had instead disposed of the shares by selling them.

Hopefully your phrase "a share price figure last given for that" is intended to mean that, but I can see plenty of other possible intended meanings for that phrase, so cannot really be certain...

Gengulphus

[troutisout] 19/11/2013 12:07

Thank you very much MIATA

[troutisout] 19/11/2013 11:47

Gengulphus,

Just reading the above and am interested in this in particular, if I transfer some shares in an AIM company to my wife, then that would be deemed as Nil cost/proceeds to me and my wife would have to use my buying costs as her own.
If I have held the stock for a long time and have a section 104 (is that right?) holding and a share price figure last given for that, will that figure be the cost to my wife for those shares? (plus any extra costs incurred for the transfer)
Will it matter if those shares are bought from her shortly after in a company takeover?

TIA,

Trout.

[renew] 15/11/2013 11:22

Many thanks Gengulphus for your excellent explanation/clarification.

[gengulphus] 14/11/2013 20:33

I'm fairly certain it means pretty much what it says - the number of properties you live in, not the number of properties you own.

It's a moderately complex subject - see the Capital Gains Manual pages index in for the details - but I think a summary of those pages is:

You first need to work out which places are your residences. If you have just one residence, clearly it's your only residence; if you have more than one, you've got to determine which is your main residence. (And clearly if you don't have any residences, you don't have a main or only residence at all.)

Whether a property is one of your residences is determined on the facts, and the test is basically one of the ordinary English meaning of the word "reside" - is it a place where you live? You don't have to live there all the time, and so it is entirely possible that you have multiple residences - e.g. a country cottage where you live at weekends and a city flat where you live during the week. But just visiting a place occasionally doesn't make it your residence - for example, if you reckon a friend who knew your movements and habits well would say "renew lives at Suchandsuch Place - and oh yes, he owns a flat he occasionally visits briefly to keep the insurers happy", then the odds are only Suchandsuch Place is your residence and the flat isn't... In short, if you want to establish a property as your residence, make certain that a normal person would regard you as living there for at least part of the time and not just visiting. Any sort of shammed living at the property won't do the job... And assuming that it's important, I would aim to err on the cautious side: live there convincingly enough that there is no believable case that you weren't really living there.

Some sort of ownership of the property is also a requirement for it to count as your residence, but a tenancy is enough to give that. If you occupy a place under license (typical examples being staying at a hotel or with friends), you don't have that ownership and so the property isn't your residence, at least for CGT purposes.

If after all considering all that, it turns out (on the facts and on the ordinary English meaning of living or residing at a place) that you have more than one residence, you have the right to nominate whichever one of them you like as your main residence. You need to do that within two years of starting to have that particular combination of residences. If you do make such a nomination within the time limit, the residence you choose to nominate is treated as your main residence, and it doesn't matter whether it is factually your main residence or not - all that matters factually is whether it is one of your residences. Also, if you do make a nomination within the time limit, there are some ways in which you can subsequently vary it.

If you don't make the nomination within the time limit, then which of your residences is your main residence is determined on the facts - i.e. on where you in fact mainly lived. That lasts until you again have a changed set of residences, so that a new nomination period starts (or if the change reduces you to having just one residence, it automatically becomes your only residence).

In the process of writing the above, I found something that pretty directly answers your question: the "CG64495" page makes it clear that the two years start when you first move into the new property and so make it one of your residences, not when you buy it.

Gengulphus