The Lemon Fool

I have shares in Sun Life of Canada that I received when they converted (IIRC) from mutual status many years ago - I had an endowment mortgage insurance with them. They've actually been my most successful share. Given the coming drop in allowances I'm considering taking some profits now.

My question is, if I were to sell any of them and be potentially liable for CGT, what would be the "buying" price that they would be assessed at compared to my selling price? Would it be their value at the time I received them?

Have never had to be concerned with CGT before now, so I'm not very familiar with the rules - any articles that set them out in an accessible way would be welcomed. Especially as I might want to consider selling inherited property at some point as well.

TIA
Spiderbill

spiderbill wrote:Have never had to be concerned with CGT before now, so I'm not very familiar with the rules - any articles that set them out in an accessible way would be welcomed.

Demutualisation shares are likely to follow their own special rules. It could well be that you are deemed to have got them for nothing. In that case the entire proceeds are gain. Otherwise the broad principle is that you are taxed on sale price less purchase price. Establishing purchase price can be the headache, particularly when you are "given" the shares.

Alaric wrote:Demutualisation shares are likely to follow their own special rules. It could well be that you are deemed to have got them for nothing. In that case the entire proceeds are gain. Otherwise the broad principle is that you are taxed on sale price less purchase price. Establishing purchase price can be the headache, particularly when you are "given" the shares.

That's rather what I was afraid of. May be time to ask the accountant who does my small business accounts.

cheers
Spiderbill

spiderbill wrote:

Alaric wrote:Demutualisation shares are likely to follow their own special rules. It could well be that you are deemed to have got them for nothing. In that case the entire proceeds are gain. Otherwise the broad principle is that you are taxed on sale price less purchase price. Establishing purchase price can be the headache, particularly when you are "given" the shares.

That's rather what I was afraid of. May be time to ask the accountant who does my small business accounts.

cheers
Spiderbill

What you are after is s 217 TCGA 1992. They have no acquisition cost if no payment was made for them.

genou wrote:What you are after is s 217 TCGA 1992. They have no acquisition cost if no payment was made for them.

Thanks genou, I'll go and study that.

Looking like I may have to consider selling 6k now or will pay more tax later.

cheers
Spiderbill

One question: did you receive cash dividends from the shares, or did you use a Dividend Reinvestment Plan where the dividends were automatically converted into more shares?

If it's the latter, then you can treat the amount of the reinvested dividends as an acquisition cost.

genou wrote:

spiderbill wrote:That's rather what I was afraid of. May be time to ask the accountant who does my small business accounts.

What you are after is s 217 TCGA 1992. They have no acquisition cost if no payment was made for them.

If no payment was made for a transfer then typically that counts as a gift.

And a gift (to/from a non-spouse) generally involves a stepped-up cost basis for the recipient and a CGT liability for the donor. So my first instinct would be to use the value on the date I received it as my cost basis. And invite the taxman to challenge it.

londoninvestor wrote:One question: did you receive cash dividends from the shares, or did you use a Dividend Reinvestment Plan where the dividends were automatically converted into more shares?

If it's the latter, then you can treat the amount of the reinvested dividends as an acquisition cost.

Thanks for your response. I receive dividends - less witholding tax of course - so can't use that option.

cheers
Spiderbill

Lootman wrote:And a gift (to/from a non-spouse) generally involves a stepped-up cost basis for the recipient and a CGT liability for the donor. So my first instinct would be to use the value on the date I received it as my cost basis. And invite the taxman to challenge it.

Interesting thought Lootman, thanks. I've emailed my accountant so will see what the come back with.

cheers
Spiderbill

spiderbill wrote:

Lootman wrote:And a gift (to/from a non-spouse) generally involves a stepped-up cost basis for the recipient and a CGT liability for the donor. So my first instinct would be to use the value on the date I received it as my cost basis. And invite the taxman to challenge it.

Interesting thought Lootman, thanks. I've emailed my accountant so will see what the come back with.

cheers
Spiderbill

It's a wonderful fantasy. Look at the legislation and it's crystal clear. The section is about the specific situation you are asking about, and says explicitly that the acquisition cost is zero.

genou wrote:

spiderbill wrote:Interesting thought Lootman, thanks. I've emailed my accountant so will see what the come back with.
cheers
Spiderbill

It's a wonderful fantasy. Look at the legislation and it's crystal clear. The section is about the specific situation you are asking about, and says explicitly that the acquisition cost is zero.

I haven't seen that reference but intuitively it seems wrong to apply CGT to a phantom gain. If I am given something worth £100 and I later sell it for £200, then my gain is not £200 on that asset, but £100. Gifts do not have a zero cost basis just because you paid nothing for them. Rather the cost basis for the recipient of a gift is the value as of the day of that gift.

The only case i know of where the recipient of a gift inherits the original cost basis is in the case of a transfer between spouses. And even then the original cost basis is unlikely to actually be zero.

Lootman wrote:I haven't seen that reference but intuitively it seems wrong to apply CGT to a phantom gain. If I am given something worth £100 and I later sell it for £200, then my gain is not £200 on that asset, but £100. Gifts do not have a zero cost basis just because you paid nothing for them. Rather the cost basis for the recipient of a gift is the value as of the day of that gift.

The only case i know of where the recipient of a gift inherits the original cost basis is in the case of a transfer between spouses. And even then the original cost basis is unlikely to actually be zero.

In the case of demutualisation, there is no "gift". It is swapping something of value (the mutual ownership of the organisation) for something of, theoretically, equal value (shares in the non-mutual company).

SebsCat wrote:

Lootman wrote:I haven't seen that reference but intuitively it seems wrong to apply CGT to a phantom gain. If I am given something worth £100 and I later sell it for £200, then my gain is not £200 on that asset, but £100. Gifts do not have a zero cost basis just because you paid nothing for them. Rather the cost basis for the recipient of a gift is the value as of the day of that gift.

The only case i know of where the recipient of a gift inherits the original cost basis is in the case of a transfer between spouses. And even then the original cost basis is unlikely to actually be zero.

In the case of demutualisation, there is no "gift". It is swapping something of value (the mutual ownership of the organisation) for something of, theoretically, equal value (shares in the non-mutual company).

OK well genou used the phrase "no payment was made for them" which is different from your idea that there was a form of payment (in-kind), such that it is a "swap" and not a gift.

Fair enough. But then I could still argue that my cost basis is not zero. Rather it is the value of both sides of that "swap". I did not start out with nothing but rather with something of value.

SebsCat wrote:

Lootman wrote:I haven't seen that reference but intuitively it seems wrong to apply CGT to a phantom gain. If I am given something worth £100 and I later sell it for £200, then my gain is not £200 on that asset, but £100. Gifts do not have a zero cost basis just because you paid nothing for them. Rather the cost basis for the recipient of a gift is the value as of the day of that gift.

The only case i know of where the recipient of a gift inherits the original cost basis is in the case of a transfer between spouses. And even then the original cost basis is unlikely to actually be zero.

In the case of demutualisation, there is no "gift". It is swapping something of value (the mutual ownership of the organisation) for something of, theoretically, equal value (shares in the non-mutual company).

You may think that but HMRC do not. There is a long history of 'free shares' and demutualisations. The same thing happened with Standard Life and the shares issued to policyholders in that case were treated by the taxman as 'nil cost' acquisitions.

scrumpyjack wrote:

SebsCat wrote:In the case of demutualisation, there is no "gift". It is swapping something of value (the mutual ownership of the organisation) for something of, theoretically, equal value (shares in the non-mutual company).

You may think that but HMRC do not. There is a long history of 'free shares' and demutualisations. The same thing happened with Standard Life and the shares issued to policyholders in that case were treated by the taxman as 'nil cost' acquisitions.

The mutual ownership was acquired at zero cost when the individual became a qualifying member of Standard Life. On demutualisation, that ownership was swapped for shares that reflected the value of that ownership. Hence why the shares are considered to have been acquired at nil cost.

genou wrote:It's a wonderful fantasy. Look at the legislation and it's crystal clear. The section is about the specific situation you are asking about, and says explicitly that the acquisition cost is zero.

Yes, my accountant has now replied (after conferring with a colleague to make sure) and has confirmed that the aquisition cost is indeed zero, so any that I sell will be valued at the full selling price for CGT.

Rather a pity I hadn't thought of this last year when the changes were first mooted. So I guess I have to decide whether to take the profit while I still can or hold the shares indefinitely for the dividends (minus the witholding tax), but then with the dividend allowance also dropping I'll be paying tax on them as well.

Rather suggests that it might have been better to start a SIPP when they became available, and feed unsheltered dividends and profits gradually into that. But that's for another board.

Thanks for you comments everyone.
Spiderbill

spiderbill wrote:

genou wrote:It's a wonderful fantasy. Look at the legislation and it's crystal clear. The section is about the specific situation you are asking about, and says explicitly that the acquisition cost is zero.

Yes, my accountant has now replied (after conferring with a colleague to make sure) and has confirmed that the aquisition cost is indeed zero, so any that I sell will be valued at the full selling price for CGT.

Accountants usually take the most conservative interpretation of rules and, in particular, when rules conflict with other rules as here. One of the reasons I like my accountant is that he will challenge HMRC chapter and verse where he feels there is a good argument for so doing. It would be interesting to see a test case on this matter.

I had some demutualisation shares back in the 1990s. I cannot recall now exactly how I handled their sales but I doubt that I ascribed a zero cost basis as that would have made no sense to me(*).

In any event my reporting of the gains was accepted as-is. In fact in over 20 years of reporting gains the taxman has never challenged my self-reported CGT numbers. And that seems odd given that gains are not reported independently in the way that salaries, pensions, interest etc. are. But I was always in a position to defend and justify my numbers.

(*) I have however ascribed a zero cost basis for nil-paid rights, which are similar in some ways.

Well there is one way to reset 'cost' to current value - die! Then the acquisition cost in your estate is the probate value

Suppose it's a matter of how desperate you are to minimise tax

scrumpyjack wrote:Well there is one way to reset 'cost' to current value - die! Then the acquisition cost in your estate is the probate value

Suppose it's a matter of how desperate you are to minimise tax

True although that could be a false economy if your estate ends up paying 40% IHT on that value rather than 10% or 20% CGT.

Thinking about it, if someone offered me £10,000 pounds worth of shares for "free" but that came with an immediate 20% CGT liability on the entire value even though there is no gain, then I might decide to pay the donor for the shares instead. Then the normal CGT rule would apply rather than this made-up "special" confiscatory rule that makes no sense.

spiderbill wrote:So I guess I have to decide whether to take the profit while I still can or hold the shares indefinitely for the dividends (minus the witholding tax), but then with the dividend allowance also dropping I'll be paying tax on them as well.l

Partial sales are possible, just sell enough each year to utilise the CGT allowance. There are likely to be interactions between Canadian ? witholding tax and UK dividend tax so one may offset the other to an extent.