Capital Gains - Shares from Profit Sharing

[modellingman]

In the 80s and 90s, I worked for an employer who operated an employee profit sharing scheme. Each year, I received a modest appropriation of shares which were then held in trust before being transferred to me personally (in the form of a share certificate) on the 5th anniversary of the appropriation. I also bought and sold in the same company independently during this period, with the sales being effected by sending one or more of my share certificates to a broker to sell. So at any time I had a mixture of shares held personally and in trust.

Although my sales were never sufficient to incur CGT, I still have a lot of these shares left and if I sold them all now there would be a CGT liability, which I am currently trying to assess. I'm using cgtcalculator.com to assist, but one thing I am not clear about is how I treat the acquistion of shares from the profit sharing scheme. Do I treat them as being acquired on the date they were appropriated to me or is it the date 5 years later when they transferred to me from the trust? The LIFO matching rules apply to my sales and the cost (for CGT purposes) of the shares I currently hold differs according to how I treat the acquisition date of the shares from the profit sharing scheme.

Whilst using the later date accords with my practice of not selling shares until they had been transferred to me in certificated form, there is an argument for using the earlier date as it would have been possible to instruct the trustees to sell shares held in trust on my behalf (though this would have incurred an additional income tax hit).

Any thoughts, or better still, knowledge gratefully received.

[Alaric]

I still have a lot of these shares left and if I sold them all now there would be a CGT liability, which I am currently trying to assess.

The cautious approach would be to sell them in stages over tax years and keep the gain below the exempt limit on the most pessimistic of treatments. But you might need the proceeds now.

There's a takeover risk when a compulsory sale would result in proceeds exceeding the annual CGT exemption. If the CGT limit is otherwise unused, there could be a case for utilising it to reduce your risk.

[greygymsock]

if you're saying the shares were (during the 5 years) owned by a trust (a trust has its own legal personality), not just held in a nominee account on your behalf, then i'd think you only acquired the shares when they were transferred out of the trust. i'm far from being an expert on trusts, however.

[Alaric]

then i'd think you only acquired the shares when they were transferred out of the trust.

You might want to think back as to how the award of a profit sharing bonus was taxed. If income tax was due when the shares were first awarded, even if in the Trust, that probably defines the base cost. Otherwise if the award was taxable only when transferred from the Trust, that may change matters.

It may be that it's the taxation of profit sharing schemes that defines how the CGT base cost is determined, rather than the deferral of the ability to realise a profit through holding them in a Trust.

[modellingman]

The cautious approach would be to sell them in stages over tax years and keep the gain below the exempt limit on the most pessimistic of treatments. But you might need the proceeds now.

then i'd think you only acquired the shares when they were transferred out of the trust.

You might want to think back as to how the award of a profit sharing bonus was taxed. If income tax was due when the shares were first awarded, even if in the Trust, that probably defines the base cost. Otherwise if the award was taxable only when transferred from the Trust, that may change matters.

It may be that it's the taxation of profit sharing schemes that defines how the CGT base cost is determined, rather than the deferral of the ability to realise a profit through holding them in a Trust.

Thanks to both for your replies. I agree there is a practical solution of spreading the sales over several years. However, my inner-mathematician demands a more precise form of solution!

A little bit more searching has revealed the following from HMRC's Internal Manual on Capital Gains

Approved profit sharing schemes

Approved profit sharing schemes were phased out following the introduction of approved share incentive plans, see CG46490+. No application to the Board of Inland Revenue for approval of a new scheme could be made after 5 April 2001 and no shares could be appropriated to an employee under an approved scheme after 31 December 2002.

A company setting up a profit sharing scheme had to establish a trust as part of the scheme. The company paid money to the trustees with which they acquired shares. The trustees appropriated shares to eligible employees, though to get full relief from Income Tax the employee then had to leave the shares in trust for three years. (Five years up to 19 April 1996.)

The employee is treated as absolutely entitled to the shares as against the trustees of the scheme from the date of appropriation, TCGA92/S238 (1). The shares are thus deemed to have been acquired by the employee at their open market value at that date, see CG37002+.

There was no charge to Income Tax when shares were appropriated to an employee, though there may later have been a charge if, for example, shares were removed from the trust early. Any amount thus chargeable is not deductible in computing a gain or loss accruing on a disposal of the shares, TCGA92/S238 (2).

This fits exactly with the scheme that I was part of, including the the reduction of the holding period from 5 years to 3 in 1996. So the answer to my original question would appear to be that it is the earlier appropriation date rather than the later transfer date that counts for CGT purposes. In combination with my pattern of acquisitions and sales and the fluctuating share price, the LIFO matching rules have the unfortunate effect of reducing the cost base of my current holding by around 20% (compared to the case of using the transfer date).

[helfordpirate]

But weren't the LIFO rules abandonned in 2008? Disposals since then use Section 104 rules Ie. pooled average cost.
...or is there some exception for this employee scheme?

[modellingman]

But weren't the LIFO rules abandonned in 2008? Disposals since then use Section 104 rules Ie. pooled average cost.
...or is there some exception for this employee scheme?

Yes they were, and no, there's no exception as far as I am aware.

My sales and acquisitions mainly took place before 2008, and the LIFO rules (and indexing up to April 1988) applied to my sales prior to the change to Section 104 rules. The pooled average cost for the first sale after Section 104 applies is based on the mix (by date and cost) of shares held according to sales made under the LIFO rules. If the LIFO rules are not applied when they should be, this distorts the base cost when Section 104 is applicable.

The following example illustrates.

Code: Select all

Year   Type   No.   Price
2000   Buy    100   5
2005   Buy    200   7
2007   Sell   150   8


The Sell uses LIFO rules so the 150 shares are matched against the Buy of 2005, leaving 50 shares from that purchase, along with 100 from the earlier Buy in 2000 . So after Sell there are 150 shares remaining with a base cost of 850 (=100*5 + 50*7) or 5.667/share.

Had a pooling arrangement been used then the average cost per share at the Sell would have been different at 6.333/share (= (100*5 + 200*7)/(100 + 200)) giving a different base cost of 950 for the 150 shares remaining after the Sell.

I have run an example through cgtcalculator.com containing sales both before and after April 2008 and this seems to confirm that sales prior to April 2008 are dealt with using LIF0 whilst those after are based on pooled average cost.

[helfordpirate]

ok. I see. so presumably the disposals before 2008 were never sufficient for you to properly ascertain the acquisition cost ie. answer the question you are asking now.
sounds like you have the answer anyway.

[modellingman]

ok. I see. so presumably the disposals before 2008 were never sufficient for you to properly ascertain the acquisition cost ie. answer the question you are asking now.
sounds like you have the answer anyway.

You are correct in both your presumptions.

I have just about got to the end of tracking through the acquisitions, sales, demergers (two of them), takeover, consolidations, B share schemes, rights issues, etc that have occurred over the intervening 30 year period to get to a base cost I'm reasonably happy would stand up if challenged. Two days of my life I won't get back again!

[Parky]

In the 80s and 90s, I worked for an employer who operated an employee profit sharing scheme. Each year, I received a modest appropriation of shares which were then held in trust before being transferred to me personally (in the form of a share certificate) on the 5th anniversary of the appropriation. I also bought and sold in the same company independently during this period, with the sales being effected by sending one or more of my share certificates to a broker to sell. So at any time I had a mixture of shares held personally and in trust.

Although my sales were never sufficient to incur CGT, I still have a lot of these shares left and if I sold them all now there would be a CGT liability, which I am currently trying to assess. I'm using cgtcalculator.com to assist, but one thing I am not clear about is how I treat the acquistion of shares from the profit sharing scheme. Do I treat them as being acquired on the date they were appropriated to me or is it the date 5 years later when they transferred to me from the trust? The LIFO matching rules apply to my sales and the cost (for CGT purposes) of the shares I currently hold differs according to how I treat the acquisition date of the shares from the profit sharing scheme.

Whilst using the later date accords with my practice of not selling shares until they had been transferred to me in certificated form, there is an argument for using the earlier date as it would have been possible to instruct the trustees to sell shares held in trust on my behalf (though this would have incurred an additional income tax hit).

Any thoughts, or better still, knowledge gratefully received.

From memory (I was in a similar scheme), the cost for your calculation would be the price at which they were transferred to you. I used to sell my shares immediately they were transferred to me (to reinvest in something else), and I dont remember any involvement with CGT.