ursaminortaur wrote:Gengulphus wrote:biscwit wrote:I wonder whether TLF members may have more luck with the following question which baffled HMRC's first-line telephone operator!
A few months after Covid decimated flight schedules, IAG undertook a rights issue. I held IAG in my ISA and planned to exercise my rights in full. However, I had already used up my 20/21 ISA allowance so the rights had to be exercised outside the ISA, in my dealing account. I paid around £0.85 for each new share. The existing shares (in my ISA) plummeted, as you would expect.
As we approach year end, I'd like to sell some of the IAG shares held in my dealing account. They are currently oscillating between around £1.90 and £2.10 per share and show a large gain. The IAG shares in my ISA show a large loss.
Because the gain outside the ISA doesn't take account of the loss inside the ISA, I had hoped to be able to calculate a section 104 pool by reference to all share purchases, whether inside or outside the ISA. However, s.104 pools don't usually include shares in an ISA.
Does anyone have any experience of this situation? Am I able to calculate the s.104 pool by reference to share purchases inside the ISA?
I've no experience of the situation, but I
think I know how it should be dealt with:
Basically, you
cannot move money that is outside an ISA to inside the ISA except by including it as part of an ISA allowance, and
everything involved in a transaction must be on the same side of the inside-ISA / outside-ISA boundary for the transaction to take place. Since the former prevented you from getting the subscription cash into the ISA and the latter required the subscription cash and the rights to be on the same side of the boundary for the subscription to take place, the actual steps involved in exercising the rights outside the ISA would appear to me to be:
1) Withdraw the rights from the ISA - there are no restrictions of withdrawals of either cash or investments from an ISA, and rights are a (short-lived) type of investment, so there's no problem about that.
2) The subscription can then take place outside the ISA.
Or assuming you have enough money outside the ISA
1) Sell the rights in the ISA
2) Buy the rights outside the ISA
3) Take up the rights outside the ISA
Since you are selling to yourself your provider may even be willing to do it like a reverse bed-and-ISA transaction so that you only pay the fees for the repurchase rather than fees for both the sale and purchase. As I recall I did this years ago (something like 2011) with ii though I had to phone them to describe exactly what I wanted to do.
I agree one
could do it that way - though I wouldn't advise it. As you've described it, it won't achieve the same result as the process I described (withdrawing the rights from the ISA and subscribing to them outside the ISA) - it leaves more cash in the ISA and demands more cash outside the ISA. That can be fixed (give or take trading cost differences) by inserting an extra step "1.5) Withdraw the sales proceeds from the ISA". But that then leads on to the question "Why withdraw cash from the ISA and lose that part of the tax sheltering provided by the ISA?", and the only answer I know of to that is "Because otherwise I won't have enough cash outside the ISA to complete the plan". That answer won't apply to the vast majority of people in such situations, I suspect.
So in most cases, I would leave out that step 1.5 and accept the different cash outcome. But either way, the question also arises of whether to do steps 2 and 3 rather than simply combine them into buying a number of shares equal to the number of rights you had inside the ISA before step 1. Since the price of a right is generally very close to the price of a share minus the subscription cost of a right during a rights issue, buying rights and subscribing to them is unlikely to save money compared with buying the shares (and that goes for trading costs as well - yes, I suspect many brokers would do your "reverse bed-and-ISA transaction" for just one commission, but just buying the shares definitely involves just one commission. There is a potential stamp duty advantage, I think: buying rights and subscribing to them presumably only involves paying stamp duty on the cost of the rights, whereas buying the shares involves paying stamp duty on the cost of the shares, which will generally be greater by about the total cost of subscribing to the rights.
Against that, besides the somewhat greater admin complexity of buying rights and subscribing to them, there is also a possible disadvantage, namely that there is an exception to the rule that the price of a right is generally very close to the price of a share minus the subscription cost of a right during a rights issue: if the price of a share drops to very close to the subscription cost, the price of a right can be expected to be noticeably higher than that general rule suggests. The overall result is that buying rights and subscribing to them
might save money compared with buying the shares, but the amount it will save can be expected to be very little at best and it also
might cost you rather more. Not saying you'll never encounter a situation where it will save you a worthwhile amount of money - but I
am saying that any time you come up with the idea of buying rights in order to then subscribe to them,
check as close as possible to the time you trade that it's actually going to save you money compared with simply buying the shares, and I
am predicting that almost all of the time, the answer is going to be "No", or possibly "Yes, but so little that it's not going to be worth my while dealing with the extra admin".
BUT all of the above is pretty much besides the point as far as the question raised by the OP is concerned. That question was not how to deal with a rights issue, but how to deal with the CGT computations following a rights issue that had been dealt with in a certain way: biscwit had not had the cash available in the ISA to subscribe to the rights, and had instead taken them up outside the ISA. That option of taking them up outside the ISA was presumably offered by biscwit's broker, and I would be practically certain that such an option offered by a broker would be done by withdrawing the rights from the ISA and then subscribing to them outside the ISA: it's the simplest way to do it, both as regards having just two steps and as regards not involving extra communications with their client about things like "you need to have more cash available outside the ISA than just the subscription price", "this will involve a cash withdrawal from your ISA", "this will involve a rights purchase outside the ISA and subscribing to them, which may well be disadvantageous to you compared with just buying the shares", etc. Basically, a broker who wants to implement client instructions to take the rights up outside the ISA would IMHO have to be insane to take on that extra complexity.
Anyway, all of this was done last September, when the IAP rights issue happened. It was done the way it was, and no amount of advice given now about how to do it is going to change that. I'd guess that biscwit doesn't currently know the technical details of exactly how it was done, as otherwise he or she would probably know how to deal with the CGT computations and so wouldn't be asking the question. So my suggestion to check all the documentation provided by the ISA manager and (if that fails) asking the ISA manager stands. You're right to point out that it could have been done in other ways, so the documentation check should involve keeping an eye open for hints that it was done some other way. But it seems so unlikely to me that if it comes down to asking the ISA manager, I would ask simple questions based on the assumption that it was done by withdrawing the rights and subscribing to them, leaving the ISA manager reply along "You've made incorrect assumptions about how the transaction was done" lines if necessary.
Gengulphus