CG51622 - Share identification rules for corporation tax: section 104 holding: disposals from the holding
Disposals
Where a company disposes of all the shares in the Section 104 holding the indexation allowance due is simply the difference between the pool of qualifying expenditure and the indexed pool of expenditure, TCGA92/S110 (3).
Where a company only disposes of some of the shares in the Section 104 holding it is necessary to apportion the allowable cost and the indexation allowance due. Both the pool of qualifying expenditure and the indexed pool of expenditure are apportioned using the same formula. The indexation allowance due on a part disposal is the amount by which the apportioned pool of indexed expenditure exceeds the apportioned pool of qualifying expenditure, TCGA92/S110 (2).
Because the Section 104 holding is treated as a single asset the part disposal rules of TCGA92/S42 apply on a disposal of less than all the shares in the holding. In strictness you should apportion both the cost of the shares and the indexed cost using the A/A+B formula where A equals disposal proceeds of sale and B the market value of the remaining asset. But in practice the apportionment may be made by reference to the number of shares sold. But see CG51919+, if a share reorganisation involves different classes of share.
Example
- May 2012 a company bought 2,000 shares in B Ltd at £4.50 per share.
- January 2014 the company took up a rights issue of two new B Ltd shares for each share held at a price of £5 per share.
- March 2016 the company solds 600 shares at £6 per share.
- The company incurred costs of £30 in relation to the disposal.
Section 104 Holding
| - | Number of shares | Pool of qualifying expenditure | Indexed pool of expenditure |
|---|---|---|---|
| Step 1 | - | - | - |
| A Section 104 holding is created in May 2012 | 2,000 | £9,000 | £9,000 |
| Step 2 | - | - | - |
| The rights issue in January 2014 is an operative event | - | - | - |
| Indexation | - | - | - |
| £9,000 x 0.042 (HMRC published factor) | - | - | £378 |
| - | 2,000 | £9,000 | £9,378 |
| Step 3 | - | - | - |
| Add the cost of the rights issue shares to the two pools | 4,000 | £20,000 | £20,000 |
| - | 6,000 | £29,000 | £29,378 |
| Step 4 | - | - | - |
| The part disposal in March 2016 is an operative event | - | - | - |
| Indexation | - | - | - |
| £29,378 x 0.034 (HMRC published factor) | - | - | £999 |
| - | 6,000 | £29,000 | £30,377 |
| Step 5 | - | - | - |
| Reduce the two pools by the apportioned amounts of cost and indexation (from the Practical Method) | (600) | (£ 2,900) | (£ 3,038) |
| Section 104 holding following disposal in March 2016 | 5,400 | £26,100 | £27,339 |
Capital Gain - Strict Method
You apportion the pool of indexed expenditure and the pool of qualifying expenditure using the formula:-
- Disposal proceeds divided by (Disposal proceeds plus Market value of remaining shares)
The market value of the B Ltd shares on date of sale is £6.20 per share. If the shares are quoted the market value, TCGA92/S272 (3), will not necessarily be the same as the price received by the company, see CG59510.
| - | - | Amount |
|---|---|---|
| Pool of indexed expenditure | £30,377 x {£3,600/(£3,600+£33,480)} = | £2,950 |
| Pool of qualifying expenditure | £29,000 x {£3,600/(£3,600+£33,480)} = | £2,816 |
| Indexation allowance | Pool of indexed expenditure - Pool of qualifying expenditure | £134 |
| Disposal proceeds (Consideration) | - | £3,600 |
| Less Cost and Cost of disposal | £2,816 and £30 | (£2,846) |
| - | Unindexed gain | £754 |
| - | Less Indexation | (£134) |
| - | Chargeable gain | £620 |
Capital Gain - Practical Method
You apportion the pool of indexed expenditure and the pool of qualifying expenditure using the formula:-
- Number of shares sold divided by Total number of shares in pool
| - | - | Amount |
|---|---|---|
| Pool of indexed expenditure | £30,377 x (600/6,000) = | £3,038 |
| Pool of qualifying expenditure | £29,000 x (600/6,000) = | £2,900 |
| Indexation allowance | Pool of indexed expenditure - Pool of qualifying expenditure | £138 |
| Disposal proceeds (Consideration) | - | £3,600 |
| Less Cost and Cost of disposal | £2,900 and £30 | (£2,930) |
| - | Unindexed gain | £670 |
| - | Less Indexation | (£138) |
| - | Chargeable gain | £532 |
The capital gain has been computed by both the strict method using the A/A+B formula and the practical method using the number of shares sold. At Step 5 the adjustment has been made using the practical method. All future computations will use the practical method.