Shares

Capital Gains Tax - Disposal of Shares

This section deals with a number of practical and topical capital gains tax issues that arise in relation to the disposal of shares. It would not be possible to cover all the possible capital gains tax aspects here and as such the material is not exhaustive. It is hoped, nonetheless, that readers will find the following material of practical benefit.

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Calculation of Gain - General

Like any other capital gains tax computation, a chargeable gain on the disposal of company shares is arrived at by deducting the cost of the shares (adjusted for inflation, as appropriate) from the net consideration received for the disposal of the shares.

The calculation is relatively straightforward where a person acquires one block of shares and at a later date, without there having been any changes in the number or type etc. of the shares held, sells all or part of that holding:

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Calculation of gain*

Bought 100 Ordinary €1.27 shares for €2.54 per share in 1997

Sold 50 Ordinary €1.27 shares for €3.81 per share in 1999

Gain is:

Proceeds €190.46, less cost €126.97 (50 x €2.54) = Gain of €63.49.

*(ignoring indexation, expenses of sale and personal exemption for ease of illustration)

Often, however, there will be increases in the shareholding, either because a person purchases additional shares of the same type or they receive additional shares under bonus or rights issues. There are special capital gains tax rules for these situations.

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First In - First Out (or "FIFO" rule)

Where a person holds shares of the same class which have been acquired at different dates, the shares acquired at the earlier time are deemed to be disposed of first. For example:

  • 1995/96 bought 1,000 Ordinary €1.27 shares in X Ltd. for €1.27 per share
  • 1997/98 bought 200 Ordinary €1.27 shares in X Ltd. for €1.90 per share
  • 1998/99 bought 500 Ordinary €1.27 shares in X Ltd. for €2.54 per share
  • 1999/00 sold 1,500 Ordinary €1.27 shares in X Ltd. for €3.81 per share
Sold 1,500 shares for €5713.82 in 1999/2000
Allowable cost - before indexation
FIFO

1,000 @ €1.27 €1269.74 
200   @ €1.90 €380.92 
300   @ €2.54 €761.84 
___ 
1,500

Remaining shares: 200 €1.27 Ord. in X Ltd.  acquired in 1998/99 costing €2.54 
per share. 
See Example 1.

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Disposal of shares within four weeks of acquisition

The FIFO rules are modified in any case where shares of the same class are bought and sold within a period of four weeks. Where shares are sold within four weeks of acquisition the shares sold are identified with the shares acquired within that period. Furthermore, where a loss accrues on the disposal of shares and shares of the same class are acquired within a four week period, the loss is not available for offset against any other gains arising and instead is only available for set off against any gain that might arise on the subsequent disposal of the shares so acquired in the four week period - this provision does not apply where there is a gain on the disposal.

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Bonus / Rights Issues

Sometimes the holder of a class of shares will receive additional shares, being either a bonus issue (no additional cost) or a rights issue (for a cost which is usually less than open market value), in respect of their holding. In these situations, despite the fact that the new shares are actually acquired at a later date, they are deemed to have been acquired at the date the original shares giving rise to the bonus or rights issue were acquired. Thus, if a person acquired, say, 100 shares in company X Ltd in 1996/97 and in 1998/99 received 50 shares as part of a bonus or rights issue they will be deemed to have held the entire holding of 150 shares from 1996/97.

Furthermore, there is no question of imputing a notional cost or value for the new shares acquired but the actual price paid to acquire the shares under a rights issue is allowed as enhancement expenditure.

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Bonus Issue

The effect of the above on a bonus issue is that the original cost is diluted between the original shares and the new shares acquired, for example:
1996/97 acquired 100 Ordinary €1.27 shares in X Ltd. for say €380.92 (or €3.81 per share).

1998/99 acquired 50 Ordinary €1.27 shares in X Ltd. for no cost (bonus issue 1 for 2).

All 150 shares are deemed to have been acquired in 1996/97 for a total cost of €380.92.

The revised cost per share is €2.54 (i.e. all 150 shares are deemed to have been acquired in 1996/97 for a total cost of €380.92 which "dilutes" the allowable cost per share to €2.54, €380.92 allowable cost, 150 shares). See Example 2.

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Rights Issue

The treatment for shares acquired under a rights issue is the same as for a bonus issue except that an allowance has to be made for the amount paid to acquire the additional shares. Such payments are treated as enhancement expenditure, so that on the subsequent disposal of any of the shares, part of the cost of the rights issue will be attributed to the shares sold. Thus, using the same figures from the example immediately above, but assuming the additional shares acquired represented a rights issue for which a payment of, say, €190.46 was made (€3.81 per share in rights issue) the resulting position would be as follows:

Again, all 150 shares are deemed to have been acquired in 1996/97 for a cost of €380.92 i.e. cost of €2.54 per share in 1996/97. They are also deemed to have a further additional cost (enhancement expenditure) of €190.46 in 1998/99. This enhancement expenditure ('EE') is again divided equally between the total number of shares held (i.e. €190.46 150 shares or €1.27 per share EE). In simple terms, then, each share is deemed to have been held since 1996/97 and each has an allowable cost of €2.54 paid in 1996/97 and further enhancement expenditure of €1.27 paid in 1998/99. See Example 3.

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Shares of a different class

Occasionally the shares received in a bonus or rights issue will be shares of a different class to the shares held e.g. one new Preference share for every two Ordinary shares held and so on. Where this happens the position is essentially the same as above except that it is necessary to apportion the allowable cost - including enhancement expenditure in the case of rights issues - between the different classes of shares. In the case of quoted shares this apportionment is done on the basis of the first day price of the respective shareholdings after the bonus/rights issue is made (for unquoted shares this apportionment is done by reference to the respective values of the shares at the date of disposal). See Example 4.

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Example 1 - Liability on shares including FIFO rule

In July 1986 a single individual bought 2,000 ordinary shares in a quoted company at a total cost of €2539.28 (i.e. €1.27 per share).

In May 1996 the same person bought a further 3,000 ordinary shares in the same company at a total cost of €5713.82 (i.e. €190.46 per share).

In August 1998, 2,500 shares were sold and the proceeds (after expenses of sale) amounted to €6348.69.

The individual had no other chargeable gain in the tax year 1998/99.

In May 1999 the remaining 2,500 shares were sold and the proceeds (after expenses of sale) amounted to €7618.43.

The individual had no other chargeable gains in the tax year 1999/2000.

Proceeds 1998/1999 = €6348.69
Deduct 2000 shares*


Cost in 1986/87 adjusted for inflation
i.e. €2539.48 x 1.352 = €3433.37
500 shares

Cost in 1996/97 adjusted for inflation i.e. €634.87 @ €1.90 per share
€952.30 x 1.033       = €983.73       4418                   
Chargeable Gain                       1932
Personal exemption                    1270
Taxable                                662

Tax due @ 20%                      €132.40

* For the purpose of identifying what shares are sold, a "First in - First out" rule applies. This means that the shares acquired in July 1986 are all deemed to have been sold in 1998/99 in this example.

Proceeds 1999/2000 = €7618.43
Deduct 2,500 shares*


Cost in 1996/97 adjusted for inflation  i.e. 2,500 @ €1.90 per share
€4761,52 x 1.050   5000

Chargeable Gain = 2619
Personal exemption = 1270
Taxable = 1349
Tax due @ 20% = €269.69

Cost in 1996/97 adjusted for inflation i.e. 2,500 @ €1.90 per share
€4761,52 x 1.050    5000

Chargeable Gain = 2619
Personal exemption = 1270
Taxable = 1349
Tax due @ 20% = €269.69

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Example 2 - Bonus Issue of Shares

An individual has the following share transactions:
January 1985 Purchased 1,000 shares in X Ltd. at €1.90 each
February 1986 Bonus Issue of 1 for 5
July 1988 Bonus Issue of 2 for 3
October 1990 Purchased further 500 shares in X Ltd. at €5 each
August 1994 Bonus Issue of 1 for 4
May 1999 Sold 2,500 shares for €15871.73 (€6.35 each)

The original shares and bonus shares are treated as the one holding and the original cost is spread over the entire holding.

Calculation for Bonus Shares, part of the example headlined above
January 1985 October 1990
Number Cost Number Cost
Shares Purchased 1,000 €2539.48 500 €2539.48
Bonus Issue Feb. 1986 [1:5] 200
Bonus Issue July 1988 [2:3] 1,200 €2539.48
800
2,000 €2539.48 500 €2539.48
Bonus Issue Aug. 1994 [1:5] 400 100
2,400 €2539.48 600 €2539.48
Disposal 1999/2000 - FIFO (rules) 2,400 €2539.38 100 €424.09*
Shares retained after disposal (+ remaining cost) 500 €2155.38
Calculation of gain 1999/2000
Calculation of gain 1999/2000
Sale Proceeds €15,871.73
Less 2,400 shares (all deemed acquired in Jan.'85): €2539.48 x 1.525 = €3872.70

100 shares acquired in Oct. 1990:

€2,539.48 x 100 600
= €424.09* x 1.210 = €513   4,386

Chargeable Gain = 11,486
Personal exemption = 1,270
Taxable = 10,217
Tax Due @ 20% = €2043

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Example 3 - Rights Issue of Shares

An individual has the following share transactions:

sample set of individual share transaction for use as part of the example headlined above
January 1989 Acquired 100 shares in X Ltd. at €6.35 per share
February 1993 Rights Issue of 1 for 2 at cost of €5 per share
June 1999 Sold 90 shares at €31.74 per share

As for bonus shares the original shares and the rights shares are treated as the one holding and the original cost is spread over the entire holding. However, unlike bonus issue the shareholder will pay to take up the additional shares. This outlay is treated as "enhancement expenditure" (EE) and is also spread over the entire holding.

Calculation for Enhancement Expenditure (EE), part of the example headlined above
Number Original (cost Feb.'93) EE (cost Jan.'89)
Purchase (Jan. 1989) 100 €635 -
Rights Issue (Feb. 1993) [1:2 ] 50 - €254
150 €635 €254
Disposal 1999/2000 150 90 £300* €153
Shares retained after disposal + remaining cost 60 €254 €102

Calculation of gain 1999/2000

Proceeds     €2857
Less
(1) original cost (Jan.1989)
€635 x 90
      150
= €381* x 1.303 =  €497

(2) enhancement expenditure (Feb.1993)
€254 x 90
      150
= €153# x 1.138 =              €174  671
Chargeable Gain                      2,187
Personal exemption                   1,270
Taxable                              917
Tax due @ 20%                        €183.35

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Example 4 - Rights issue / Shares of a different class

An individual has the following share transactions:

Example of an individual's share transactions
January 1989 Acquired 1,000 ordinary shares in X Ltd. at €6.35 per share (X Ltd is a 'quoted' company)
February 1993 Rights Issue of 1 new Preference for every 2 ordinary held at cost of €5 per share, i.e. acquired 500 Preference Shares (market value of the ordinary shares at the time was €25.39 per share while the market value of the Preference shares was €12.70 per share)
June 1999 Sold 400 Preference shares at €19 per share
  • All the shares (Ord. and Pref.) are deemed to have been acquired in Jan. 1989
  • The total allowable cost of the shares is €6349 (Jan. 1999) + €2,000 enhancement expenditure (Feb. 1993)
  • The allowable cost has to be divided between the Ordinary and Preference shares having regard to the respective values of the shares at the time the new shares were acquired as follows:
Ordinary shares 1,000 shares

Original Cost x             Market value of Ord. at Feb.'93
		            Market value of Ord. shares +
                            Preference Shares at Feb.'93
i.e. €6349 x                €25395 = €5079
		            €31744

Enhancement Expenditure

€2540 x                     €25395 = €2032
		            €31744


Preference shares 500 shares

Original Cost x             Market value of Pref. at Feb.'93
		            Market value of Ord. + Pref. at Feb.'93
i.e. €6349 x                €6349 = €1270
		            €31744

Enhancement Expenditure 

€2540 x                     €6349 = €508
	                    €31744


Calculation of gain 1999/2000

Proceeds sale of 400 Preference shares = €7619

Less

(1) original cost (Jan. '89)
= €1016 1.303 = €1324
€1.270 x 400
         500

(2) enhancement expenditure (Feb. '93)
€508 x 400
       500
      = €406 x 1.138 = €462
                                    1,787

Chargeable Gain                     €5832
Personal exemption                  1,270
Taxable                             4,562
Tax due @ 20%                       €912.43

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