* indicates required

CGT rules: an investment caveat

SO FAR, the credit crisis has provoked a plummeting
stock market with a rash of selling writes Judith Hooper, tax partner at Baker Tilly’s Milton Keynes office. But there will come a point in the not-too-distant future when investors will look to reinvest as the market bottoms out.

Currently, there are situations where private investors dabble in ‘shorting’, which is selling in advance of purchasing to take advantage of a falling market.

In such cases, it is worthwhile remembering the capital gains tax matching rules which can have unfortunate consequences for private investors. These rules apply to purchases and sales of holdings of the same shares.

The first, the original “anti bed and breakfast” rule, matches all purchases and sales on the same day. The second matches disposals with purchases in the following 30 days.

To illustrate the tax pitfalls, a couple of examples may help:

l The first concerns the ‘short seller’. On September 15, Tom (who did not already own any shares) arranged to sell 10,000 shares in Thumbs plc for £10,000 on September 22.

When he came to deliver the shares, their value had fallen so he was able to purchase the shares he needed for £5,000. Doing this he made – and is taxable on – a gain of £5,000.

l The second example concerns the reinvestor. Grace bought 1,000 shares in And Favour plc for £10,000 in 2005. On September 20 this year, she sold them for £6,000.

On October 17, the same shares were available for £2 per share and Grace decided that they had fallen as far as they were going to and were worth reacquiring, so she bought 1,000 shares for £2,000.

So what is Grace’s position? On any real measure she has made a loss. She originally paid £10,000 for her shares and now holds shares worth £2,000 and cash of £4,000 so she is down by £4,000.

But the CGT rules do not always work in the real world. They see only the sale for £6,000 and the purchase for £2,000 within 30 days. Therefore, Grace has a taxable gain of £4,000 when, in reality, she has made a loss of £4,000.

This problem only affects people reinvesting in the same share but it shows that tax rules can sometimes have unintended consequences.

For more information, contact Judith Hooper at Baker Tilly’s Milton Keynes office on 01908 687800, e-mail judith.hooper@bakertilly.co.uk or visit www.bakertilly.co.uk