Example:
The ABC UK Equity OEIC pays dividends twice a year. Dan invests £10,000 in income shares and after two months he receives his first distribution of £750, which represents income earned over the past six months.
This will be treated as follows:
Dividend income: 2/6ths x £750 = £250
Equalisation payment: 4/6ths x £750 = £500
Consequently, as a result of this return of capital, his acquisition cost for the shares is reduced to £9,500 (that is, £9,500 will be added to the cost pool, and not £10,000).
What to do with the proceeds
If the client has not earmarked the capital realised by crystallising gains within the annual exemption for a specific purpose, a tax efficient home for the funds should be considered.
Immediate reinvestment into the same fund could undo the planning undertaken.
Share matching rules
There are rules that treat the sale and immediate buy back of shares differently. This is to prevent investors benefiting from crystallising gains within the annual exemption when they have in reality never been without the shares for a significant period.
These ‘share matching’ rules mean that, where the same shares are sold and repurchased within 30 days, the full gain built up over the total time that the shares were owned is not crystallised. Instead, the repurchase cost becomes the acquisition cost for the shares disposed of and the gain/loss is calculated using this figure.
Example:
Dan sells 4,920 shares in ABC UK Equity fund on 1 March at £4.74 a share. The pooled acquisition cost for those shares was £2.24 a share, which would ordinarily realise a capital gain of £12,300 (£4,920 x £2.50).
However, Dan repurchases a further 4,920 shares in the same fund on 25 March when the share price was £4.84. As there has been a sale and repurchase of the same share within 30 days, the capital gain is calculated by substituting the pooled acquisition cost for the price paid for the new shares.
Disposal proceeds £4.74
Acquisition cost £4.84
Capital loss - £0.10 x 4,920 shares = £492
So rather than crystallising a gain which utilises his annual CGT exemption, he has created a capital loss of £492 and the opportunity to reduce the gains within has portfolio is wasted. The loss can, however, be used to offset other gains Dan may have.
There are several options which allow investors to crystallise gains to use their annual exemption and still remain invested in a particular fund without being out of the market for 30 days:
Bed and SIPP
Shares can be sold and the same shares immediately bought back in a pension, such as Sipp, which allows self-investment. This will not trigger share matching for capital gains tax as the shares are being purchased by the SIPP trustees/administrator and not personally by the investor.
