Monthly Savings Schemes in Investment Funds and Capital Gains Tax

Contents

What this guidance covers

This guidance explains how to calculate the chargeable gain or allowable loss that may arise for capital gains tax (CGT) purposes when you dispose of certain types of shares and units in a unit trust which you acquired through a monthly savings scheme.

The guidance applies to monthly savings schemes for investments held in:

  • units in an authorised unit trust,
  • shares in an approved investment trust, and
  • shares in an open-ended investment company incorporated in the UK.

Where your monthly savings scheme is within an Individual Savings Account (ISA) or a Personal Equity Plan (PEP) throughout the period you held it, no chargeable gain (nor any allowable loss) can arise on disposal of shares or units in the scheme, and you do not need to use this guidance.

The guidance below covers only straight forward situations. In particular, it does not cover cases where you give shares or units away, or you do not buy or sell them at arm's length – for example, you purchase shares from a family member.

The basics of CGT are not covered in depth here. Reference is made throughout the text to other sources of guidance, the full list of which can be found on the following page.

For simplicity, the guidance refers only to shares. But it applies equally to units in a unit trust.

Further sources of information

If you want more details about more complex circumstances, you may wish to refer to Inland Revenue Statement of Practice SP2/99, or to one or more of the Self Assessment Help Sheets. There is basic information on CGT in CGT1 (see below). You can find all the sources of information listed below via the CGT page on the HMRC website at www.hmrc.gov.uk/CGT (a link to statements of practice can be found under 'specialist material'), or by contacting an HMRC Enquiry centre or tax office. You can find the centre nearest to you at www.hmrc.gov.uk/enq, and www.hmrc.gov.uk/contactus/helplines.htm will take you to the list of contact centre helplines.

If you know very little about CGT you may wish to start by looking at CGT1 – Capital Gains Tax – an introduction. If you are having difficulty with the rest of this document you may wish to contact one of the HMRC Contact Centres (CRCCs) for more information, and/or obtain specialist advice from e.g. a lawyer, accountant or taxation specialist.

Information you will need

In order to work out the chargeable gain or allowable loss arising on the disposal of your shares you will need to gather together the history of all the shares you have bought and sold within the monthly savings scheme, that is:

  • for each purchase: the date, the number of shares bought and their cost, and
  • for each disposal: the date, the number of shares sold and the disposal proceeds.

If you started investing in a savings scheme before April 1998, you will also need access to the Retail Prices Index for the period from the time you started investing through to April 1998. The tables are produced by the Office for National Statistics, and are available from National Statistics Online:

Some basic CGT principles

Matching acquisitions and disposals – see help sheet HS284 for further explanation

Shares of the same share class in a particular company, (which includes shares held under a monthly savings scheme), are identical. They are also referred to as being 'fungible', which means that they can be replaced by an identical item. Because of this it is not always possible to identify which shares have been disposed of when you dispose of (sell or give away, etc.) only part of your total holding. So CGT has established rules to help you determine which shares you have disposed of, and in which order. You need to know this to work out the gain (or loss) you have made on the disposal and the amount of any taper relief (and, where applicable, indexation allowance, see Notes on Capital Gains for the SA return to which you are entitled.

For historical reasons, fungible shares are grouped in different ways:

  • Shares acquired on or after 6 April 1998 are treated as separate acquisitions (but all acquisitions on a particular day are treated as a single acquisition).
  • Shares acquired between 6 April 1982 and 5 April 1998 are treated as comprising a separate 'pool' of shares, called a 'section 104 holding'. The costs of the shares in the pool are added together, and then averaged: each share in the pool is treated as if it was acquired at the same average cost.
  • Shares acquired between 7 April 1965 and 5 April 1982 are treated as comprising a different pool, called a '1982 holding'. Again, the costs of the shares in this pool are added together, and then averaged, so that each share is treated as if it was acquired at the same average cost. But a 1982 holding is also subject to the "rebasing" rules under which the cost of the holding may be taken as its value as at 31 March 1982. For more information on rebasing see Help Sheet IR 280 "Rebasing – assets held at 31 March 1982".
  • Shares acquired before 7 April 1965 are subject to rebasing and other special rules.

For simplicity this guidance does not discuss how gains and losses are calculated where shares were acquired before 6 April 1982.

The basic CGT rule is that shares are treated as being disposed of on a 'last-in, first-out' basis. One exception relevant to monthly savings schemes is the so-called 'bed and breakfasting' rule (see below, and help sheet HS284 . The full identification rules are that you match the shares you dispose of with shares you acquired in the following order:

  • First, shares acquired on the same day as the disposal;
  • Second, shares acquired in the 30 days following the disposal (the 'bed and breakfasting' rule),
  • Third, shares acquired after 5 April 1998, working backwards in time from the date of disposal;
  • Fourth, shares in the section 104 holding;
  • Fifth, shares in the 1982 holding;
  • Sixth, shares held on 6 April 1965.

Taper relief and indexation - see help sheet HS279, and Notes on Capital Gains Tax section 5 for further explanation

Taper relief is available for periods of ownership from 6 April 1998.

Indexation allowance is available for periods of ownership up to April 1998.

A section 104 holding of shares has a pool of qualifying expenditure (the cost price and associated allowable costs) and an indexed pool of expenditure.

In order to calculate the indexation allowance due on a section 104 holding a calculation should strictly be performed for every 'operative event' – that is, every time something (such as a purchase or sale of shares) increases or reduces the size of the pool of qualifying expenditure. For shares in a monthly share scheme this could involve at least 12 calculations a year because there were 12 purchases of shares in the year. Making those calculations would be both time consuming and laborious.

So where certain conditions are met, Statement of Practice SP2/99 allows a simplified calculation to be used, so that only one calculation is performed for the year instead of twelve. Under this simplified arrangement all acquisitions of shares in the accounting year for the investment fund concerned are regarded as having been made in the 7th month of the accounting year of the fund concerned.

Mergers of funds and other reorganisations

Investment funds may be involved in certain reorganisations. For instance:

  • two funds may merge into one new fund and the new fund issues shares to all the shareholders in the old (merged) funds
  • one fund may absorb another one and issue new shares to the holders of shares in the fund which has been taken over.

Special CGT rules may apply where such a reorganisation has occurred and, as a result, the shares you dispose of will not be shares in the same fund as the shares you originally acquired. In simple cases your original shares will be treated as the same as the shares you later disposed of. Your gain or loss on the disposal of the later shares is calculated by reference to the cost of the original shares.

There is more guidance on the CGT rules for share reorganisations in Self Assessment Help Sheet HS285.

Outline of the CGT Calculation

There are various steps you will need to go through to work out the gain or loss when you dispose of shares acquired under a monthly savings scheme.

First step - sorting out your acquisitions

In order to match the shares you dispose of with the shares you acquired you will first need to sort your acquisitions into the different categories described in the section on "Matching" above. You will need to divide/apportion the shares you held into –

  • each separate (monthly) acquisition made on or after 6 April 1998
  • the pool of shares acquired between 6 April 1982 and 5 April 1998 which make up the "section 104 holding"
  • the pool of shares acquired between 7 April 1965 and 5 April 1982 which make up the "1982 holding"
  • shares held at 6 April 1965.

Second step - matching the shares disposed of with your acquisitions

The second step is to determine the date of the earliest acquisition to be matched against your disposals. Start with: –

  • shares acquired on the day of disposal, then
  • shares acquired within the thirty days after the date of disposal, then
  • shares acquired before the date of disposal, working backwards on the 'last-in, first-out' principle.

Once all the shares disposed of have been matched against acquisitions it is important to record that fact, as those acquisitions will not be available for matching against a subsequent disposal.

If, in order to match the required number of shares, you need to include shares acquired before 6 April 1998 which are in a section 104 holding, you will also need to calculate the indexation allowance on the pool. How you do this is outlined in the "Third step" below and is illustrated in Example_1.

Third step - calculating indexation allowance on a section 104 holding

There is detailed guidance on how to work out the indexation allowance on a section 104 holding in Help Sheet HS284 "Shares and Capital Gains Tax". The simplified method set out in

(and illustrated in Example 1) may be adopted in many cases instead of the strict approach which now follows.

In outline, the section 104 holding starts with the first eligible acquisition (after 5 April 1982), at which time three pieces of information are relevant: the date of acquisition, the number of shares acquired, and the cost of acquiring those shares (the qualifying expenditure).

At the date of the next 'operative event' (such as the acquisition of shares in the next month) the acquisition cost of the first shares in the pool is indexed to the calendar month of the subsequent event. (An operative event happens every time something increases or reduces the size of the pool of qualifying expenditure.)

For instance,

Acquisition cost £100
Acquisition date 10 January 1994
RPI for January 1994 141.3
Date of next event 10 February 1994
RPI for February 1994 142.1
Increase factor = (142.1 – 141.3) ÷ 141.3 = 0.00566
Indexation allowance = £100 × 0.00566, or £0.566
Indexed cost = £100.566

 

The indexed cost, together with the qualifying expenditure of the second acquisition, forms the indexed pool of expenditure at the time of the second acquisition. The two acquisition costs without the indexation allowance form the qualifying expenditure for the total holding.

At the date of the third acquisition (assuming no other 'operative event' has occurred) the indexed pool of expenditure is updated again by calculating the indexation allowance between the calendar months of the second and third acquisitions, and adding the acquisition cost of the third acquisition.

(Although it is possible to perform this calculation each time an acquisition is made, it is not usually done until a disposal occurs. Where the conditions are met, it is useful to take advantage of Statement of Practice SP2/99 in order to reduce the number of calculations involved, and it is the SP2/99 method that is illustrated in Example_1.)

Indexation allowance is frozen from April 1998 for capital gains tax purposes. The section 104 holding after that date contains the total number of shares in the holding. The holding is treated as having been acquired at the total of the qualifying expenditure up to April 1998, and has an indexed pool of expenditure up to that month.

Fourth step – grouping for taper relief purposes

Shares are not pooled for taper relief purposes. But they can be 'grouped' in order to simplify the calculation of taper relief. The 'grouping' will have to be different for disposals at different times and must therefore be done again for each disposal in the order in which they occur. Grouping is illustrated in Example_2. See also Self Assessment Help Sheet HS279.

Taper relief rates depend on the 'qualifying holding period'. In relation to shares acquired via a monthly savings scheme this period will start either on the date of acquisition or, if it is later, on 6 April 1998. The period ends on the date of disposal.

In normal circumstances shares acquired through monthly savings schemes qualify for non-business asset taper relief. Examples given in this guidance assume that non-business asset taper relief applies according to the rules for the tax year 2004-05. If you believe your holdings qualify for business asset taper relief, you may wish to seek further advice from the Revenue or your professional adviser.

The key aspect of the qualifying holding period is the number of whole years it contains. For instance, a period of four years eleven months, and a period of four years two days, both provide eligibility for the same amount of taper relief – the amount relating to four whole years.

The only time that a particular date is of interest is where the first shares in a section 104 holding were acquired or purchased before 17 March 1998. In that case a bonus year is added to the number of whole years that make up the qualifying holding period of the section 104 holding for taper relief purposes. A 1982 holding (and any shares held at 6 April 1965) will also qualify for the bonus year.

Taper relief is a relief on gains, not losses. For simplicity, this explanation assumes that all disposals have resulted in a gain, not a loss.

Non-business asset taper relief starts when the number of whole years in the qualifying holding period (including any bonus year) reaches three years. So the first grouping of shares within those shares being disposed of would contain those with a qualifying holding period of less than three whole years (including any bonus year).

The next grouping of the shares disposed of would contain those that had a qualifying holding period of three whole years (including any bonus year), then those that had a qualifying holding period of four whole years, and so on.

Fifth step – working out the gain or loss

You then calculate the aggregate gain for each grouping of shares. CGT1 – an Introduction to Capital Gains Tax - gives some basic guidance on working out gains and losses. But at its simplest, the gain on a sale of shares in a monthly savings scheme will be the net disposal proceeds from the sale less the cost of the shares which are treated under the matching rules as the ones which you sold (and any indexation allowance attributable to that cost).

Examples

The following two examples show the type of calculations needed for disposals involving indexation (Example 1, disposal in 1999) and taper relief (Example 2, first acquisition in 1998). In some 'real life' cases both indexation and taper relief may be available, in which case the indexation calculations would be performed first.

Example 1

Mr Collins invested in a monthly share scheme for two years in the middle 1990s. In 1999 he sold 500 of the shares at a price of £5.50 per share. The acquisitions are detailed in the table at the end of this example.

The accounting year for the share scheme coincided with the calendar year, and Mr Collins invested for two complete calendar years. The acquisitions will form a Section 104 holding, and as they fulfil the conditions, Mr Collins can apply the method described in Statement of Practice SP2/99 when performing the calculations for the pool.

In the first full year of investment Mr Collins acquired 271.5 shares for a total of £1,200. Under SP2/99 these shares are all treated as being acquired on the date when Mr Collins makes his investment in the 7th month of the investment fund's accounting year, 1 July 1995.

In the second full year of investment Mr Collins acquired 301 shares for a total of £1,500. These are all treated as being acquired on 1 July 1996. So, the pool starts off with:

 
'date of acquisition' number of shares qualifying expenditure (£) indexed pool of expenditure (£)
1 July 1995 271.5 1,200 1,200

The RPI in July 1995 was 149.1, and that in July 1996 was 152.4. The indexation factor was therefore (152.4 – 149.1) ÷ 149.1, or 0.022. Multiplying the qualifying expenditure by this figure gives an answer of £26.40. So, following the acquisitions in 1996, the pool becomes as follows:

 
'date of acquisition' number of shares qualifying expenditure (£) indexed pool of expenditure (£)
1 July 1995 271.5 1,200 1,200
Add indexation     27
      1,227
1 July 1996 301 1,500 1,500
  572.5 2,700 2,727

The date of disposal was after April 1998, so the pool is indexed to April 1998. The indexation factor for the period from July 1996 to April 1998 is 0.067, which gives an indexation allowance of 182.71. So the pool becomes as follows:

 
'date of acquisition' number of shares qualifying expenditure (£) indexed pool of expenditure (£)
brought forward 572.5 2,700 2,727
Add indexation     183
  572.5 2,700 2,910
disposal 500 2,358 2,542
carried forward 72.5 342 368

The section 104 holding contains 572.5 shares at a total indexed acquisition cost of £2,910, or £5.08 per share. When the disposal of the 500 shares occurs the qualifying expenditure and indexed pool of expenditure are reduced proportionately. So the pool of qualifying expenditure is reduced by £2,358 (2,700 × [500 ÷ 572.5]), leaving the pool with £342. And the indexed pool of expenditure is reduced by £2,542 (2,910 × [500 ÷ 572.5]), leaving the pool with £368.

Mr Collins disposed of 500 shares at a price of £5.50 per share, or £2,750 in total. The gain he realised is therefore £208, calculated as follows:

Disposal proceeds £2,750
Less allowable cost £2,358
Gain before indexation £ 392
Less indexation (2,542 – 2,358) £ 184
Chargeable gain £ 208

The shares would qualify for a bonus year for taper relief purposes, but as the sale occurred in 1999 the qualifying holding period including the bonus year is less than the minimum 3 whole years (after, in this case, 6 April 1998) for any non-business asset taper relief to be due.

Table of Mr Collins' acquisitions
Date of acquisition Number of shares Cost of shares (£)
1 January 1995 2 10
1 February 1995 23 100
1 March 1995 23 100
1 April 1995 22 100
1 May 1995 24 100
1 June 1995 24 100
1 July 1995 23 100
1 August 1995 23 100
1 September 1995 21.5 100
1 October 1995 23 100
1 November 1995 22 100
1 December 1995 21 100
Total for the fund’s accounting year to 31 December 1995 271.5 1,200
Date of acquisition Number of shares Cost of shares (£)
1 January 1996 26 125
1 February 1996 23 125
1 March 1996 25 125
1 April 1996 26 125
1 May 1996 25 125
1 June 1996 27 125
1 July 1996 26 125
1 August 1996 26 125
1 September 1996 25 125
1 October 1996 23 125
1 November 1996 24 125
1 December 1996 25 125
Total for the fund’s accounting year to 31 December 1996 301 1,500

Example 2

Miss Lee joined a monthly savings scheme on 1 May 1998. Her acquisitions are detailed in the table at the end of this example. On 15 January 2003, she disposed of 500 of the shares at a price of £20 per share, but continued her monthly subscriptions.

To work out which shares Miss Lee has sold (for CGT purposes), follow the matching rules described above –

  • First, there are no shares acquired on the same day as the disposal.
  • Second, there are 5 shares acquired (on 1 February 2003) within thirty days after the disposal, so they are treated as disposed of in the 15 January disposal.
  • That leaves 495 shares sold which must be matched with earlier acquisitions, working back from the date of disposal on the 'last-in, first-out' principle. Miss Lee is therefore treated as having disposed of all the 491 shares she acquired between 1 August 1998 and 1 January 2003 inclusive, plus 4 of the 10 shares acquired on 1 July 1998.

The shares disposed of can now be "grouped" in order to work out the gains arising and how much taper relief is available.

As the disposal date is 15 January 2003, none of the shares in the disposal that were acquired after 15 January 2000 (including the 5 shares acquired on 1 February 2003) will qualify for non-business assets taper relief, as their qualifying holding period is less than three whole years. These shares can therefore be grouped. There are 334.5 shares in this group, acquired for a total cost of £4,300. The gain on disposing of these shares is (ignoring any incidental costs of acquisition or disposal) –

 

Disposal proceeds (334.5 shares @ £20 each) £6,690
Less costs of acquisition £4,300
Gains not eligible for taper relief £2,390

The shares sold which were acquired between 16 January 1999 and 15 January 2000 inclusive have qualifying holding periods of three whole years. This grouping consists of 105.5 shares, acquired for a total cost of £1,200. The gains on disposing of these shares are (ignoring any incidental costs of acquisition or disposal) –

 

Disposal proceeds (105.5 shares @ £20 each) £2,110
Less costs of acquisition £1,200
Gains not eligible for taper relief £ 910

With a 5% taper relief rate, the relief available is £46, and the gains after taper relief are reduced to £864.

The remaining 60 shares disposed of have qualifying holding periods of four whole years. This group consists of the shares acquired from August 1998 to January 1999 inclusive, and 4 shares from the July 1998 acquisitions. So the figures for this grouping are –

 

Disposal proceeds (60 shares @ £20 each)   £1,200
Less costs of acquisition    
August 1998 to January 1999 shares £600  
July 1998 shares (4/10 x £100) £ 40 £ 640
Gains eligible for taper relief   £ 560

With a 10% taper relief rate, the relief available is £56, and the gains after taper relief are reduced to £504.

Summary
Length of qualifying holding period Total shares disposed of Gains (£) Taper relief available (£)
Less than 3 whole years 334.5 2,390 nil
3 whole years 105.5 910 46
4 whole years 60 560 56
Total 500 3,860 102

After the disposal on 15 January 2003 the shares that Miss Lee retained comprised the 10 acquired on 1 May 1998, the 10 acquired on 1 June 1998 and 6 of the 10 acquired on 1 July 1998.

 

Table of Miss Lee's acquisitions
Date of acquisition Number of shares Cost of shares (£)
1 May 1998 10 100
1 June 1998 10 100
1 July 1998 10 100
1 August 1998 10 100
1 September 1998 9.5 100
1 October 1998 9 100
1 November 1998 10 100
1 December 1998 9 100
1 January 1999 8.5 100
1 February 1999 8 100
1 March 1999 8 100
1 April 1999 8 100
1 May 1999 8 100
1 June 1999 8 100
1 July 1999 8 100
1 August 1999 8 100
1 September 1999 9 100
1 October 1999 9 100
1 November 1999 10 100
1 December 1999 10.5 100
1 January 2000 11 100
1 February 2000 8 100
1 March 2000 7 100
1 April 2000 6 100
1 May 2000 5 100
1 June 2000 5 100
1 July 2000 5 100
1 August 2000 5 100
1 September 2000 6 100
1 October 2000 7 100
1 November 2000 8 100
1 December 2000 8 100
1 January 2001 8 100
1 February 2001 8 100
 
Date of acquisition Number of shares Cost of shares (£)
1 March 2001 10 125
1 April 2001 10 125
1 May 2001 10 125
1 June 2001 10 125
1 July 2001 10 125
1 August 2001 10 125
1 September 2001 10 125
1 October 2001 10 125
1 November 2001 12.5 125
1 December 2001 12.5 125
1 January 2002 12.5 125
1 February 2002 12.5 125
1 March 2002 12 125
1 April 2002 12 125
1 May 2002 10 125
1 June 2002 10 125
1 July 2002 10 125
1 August 2002 10 125
1 September 2002 10 125
1 October 2002 10 125
1 November 2002 12.5 125
1 December 2002 10 125
1 January 2003 7 125
1 February 2003 5 125
1 March 2003 5 125
1 April 2003 5 125
1 May 2003 10 125