Rajput1962 wrote:Gengulphus wrote:Edit: One point I should note is that it doesn't do calculations of the individual capital gains and losses. That's part of the subject of HMRC's
Capital gains summary notes, but unfortunately those notes only cover it rather cursorily and unsatisfactorily...
I have been using Microsoft's Money program (available as free download) to track my investment buys/sells and using this to calculate profit/losses on them. When selling fewer shares than the total holding, there is an option that pops up to decide whether to match shares sold to the earliest bought, latest bought, minimum gain and maximum gain. I have been using this to track total gains and can see at a glance whether i have exceeded the annual CGT limit or not. I've always kept below the limit but this year i have tried out a few what-ifs around selling X as opposed to Y and what difference that makes to the overall gain/loss. I did one day check how Money did it's calculations by exporting all buys/sales to excel and satisfied myself that its allocation logic is correct.
Sounds wonderful - for someone dealing with the
US taxman! Or at least, I think I've read somewhere that the US taxman allows people to match their sales to their purchases in a variety of ways, including (at least) those four.
However, the
UK taxman specifies exactly how one must match sales to purchases - and the method he specifies isn't any of those four... So while Microsoft Money may be 'correct' in that those options do what they say on the tin, none of them can be guaranteed to be correct for filling in a UK tax return. And while any of them might happen to end up producing the right matching in quite a few cases, the only way to find out whether they do that in any particular case is to work out what matching the UK CGT rules require and then see which (if any) of the four options produces it...
Fairly briefly and ignoring corporate actions, the required matching for a UK tax return can be worked out by doing the following for each type of share involved:
1) List
all your sales and purchases of the share concerned in date order. For each one, you require its date, the number of shares it is for, the sum of its allowable costs (including the number of shares times the share price at which purchased for purchases), and its proceeds (number of shares times share price for which they were sold, without deducting any costs) in the case of sales. I stress "all" because if you have more than one broker account with the same type of share in them (or a broker account and a certificated holding), you must do the calculation for all of them together, not separately (this implies that if a broker gives you a statement about how your sales and purchases match up for CGT, its usefulness to you is likely to be limited unless you hold no other broker accounts and no certificated holdings.
2) If you have any cases of two or more purchases on the same day, merge them into a single 'purchase' of their combined number of shares for their combined allowable costs.
3) If you have any cases of two or more sales on the same day, merge them into a single 'sale' of their combined number of shares for their combined allowable costs and their combined proceeds.
4) At this point, you have at most two transactions in the share on any single day, and if there are two, one is a sale and the other a purchase. If you have any cases of a sale and a purchase on the same day, 'match' them. (If they're for the same number of shares, calculate a gain or loss from them and remove both from the list. If they're for different numbers of shares, apportion the transaction for the larger number of shares into a 'matching' portion that has the same number of shares as the other transaction and a 'remainder' portion that has the rest of the shares, then calculate a gain or loss from the 'matching' portion and the other transaction, replace the transaction for the larger number of shares in the list with its 'remainder' transaction, and remove the other transaction from the list.)
5) At this point, you have at most one transaction in the share on any single day. Starting with a 'pool' of 0 shares bought for £0 allowable costs, work through the transactions in the list from the earliest to the latest. When you encounter a purchase, merge it into the 'pool'. When you encounter a sale, look ahead in the list to see whether there is a purchase in the following 30 days, then:
* if there are one or more such purchases, pick the earliest of them and 'match' the sale to it as described in 4) above. That will remove the sale and/or that purchase from the list, after which you continue working through the list in date order, starting with what is now the earliest-dated transaction in the list (which might be the 'remainder' of the sale we've just processed, or might be a later-dated transaction from the original list).
* If there are no such purchases, 'match' the sale to the 'pool', pretty much as described in 4) above. Normally, the number of shares in the 'pool' is at least the number sold, so this removes the sale from the list, and possibly reduces the 'pool' to no shares in the process. (That
might not be the case if genuine shorting of shares has been done, as opposed to trading in CFDs or other derivatives that effectively short the shares - but anyone who genuinely shorts shares needs someone more knowledgable than me to tell them how to do CGT calculations for their transactions!)
A couple of points to note about that process:
* In principle, it starts step 5 right back at the beginning of your holding history, no matter how long ago that is. However, as long as you're certain you have
all the transactions in the next 30 days after a sale in the list at the start of step 5), it is guaranteed that the way that sale is matched to purchases won't be changed by subsequent transactions. So even if your last sale in a tax year happens on April 5th, its very last day, the way it matches purchases becomes completely fixed on the 31st following day, i.e. on May 6th. So it
is possible to finalise the CGT computations for a tax year, provided you wait until May 6th or later to do so! (And if your last sale in a tax year is earlier than April 5th, CGT computations finalisation day moves correspondingly earlier than May 6th - though never earlier than April 6th, of course.) This also means that provided you have reached CGT computations finalisation day, you can take step 5 only up to the last transaction in the tax year and record the state of the 'pool' and the list of remaining transactions, as the starting point for the following tax year's CGT computations.
* My description above of how to match sales to purchases for CGT is only valid if the earliest sale is no earlier than April 6th, 2008, because before then, a rather different set of sale-to-purchase matching rules was in effect - and there's a date before that (which IIRC was April 6th, 1998) before which a third set of such rules was in effect. (And I'm not entirely certain that was the first change of those rules after CGT was originally introduced!)
P.S. I see on trying to preview this post that Maylix has said much the same thing, only much more briefly and with less detail of the exact procedure but mentioning CGTcalculator.com. That's generally better if you know what the sequence of transactions is and just want to calculate the gains and losses - but if you want to
plan a sequence of transactions to achieve a desired set of gains and losses, understanding the detailed sequence of the calculations can be helpful. So I regard this post and Maylix's post and complementing each other.
Gengulphus
. Despite several restarts i think i've given up on my approach. highriskpaul's version is so much neater - but it doesn't deal with CGT.
