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Calculating CGT on shares after merger

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RaspberryFool
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Calculating CGT on shares after merger

#432305

Postby RaspberryFool » August 3rd, 2021, 6:30 pm

I was beginning to look in to how my wife and I would calculate any capital gains on her share holdings, most of which are subject to Dividend Reinvestment options. Thus, I read the HMRC guide on how to calculate capital gains on the same type of shares in a company that one bought at different times.
Therefore I was beginning to put all the figures into a spreadsheet in order to calculate the average purchase prices but stumbled upon an anomaly for which neither the HMRC site nor this forum seems to throw any light upon as to what process to follow. Perhaps somebody else can help?
She held both Murray Income Trust (MUT) and Perpetual Income & Growth (PLI). On 6th November 2020, as a result of a Corporate Action, the shares of PLI were merged into MUT. Thus the number of MUT shares in her account increased but no price of those shares is shown on her statement. So the question is, how do we calculate the average purchase price of her MUT shares?
I'm guessing that we will have to calculate the total purchase amount of all her PLI shares then divide that by the number of new MUT shares acquired. However, I'd like to know if that would be the correct method that would suffice for the HMRC.

RF

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Re: Calculating CGT on shares after merger

#432308

Postby Lootman » August 3rd, 2021, 6:40 pm

RaspberryFool wrote:I was beginning to look in to how my wife and I would calculate any capital gains on her share holdings, most of which are subject to Dividend Reinvestment options. Thus, I read the HMRC guide on how to calculate capital gains on the same type of shares in a company that one bought at different times.

Therefore I was beginning to put all the figures into a spreadsheet in order to calculate the average purchase prices but stumbled upon an anomaly for which neither the HMRC site nor this forum seems to throw any light upon as to what process to follow. Perhaps somebody else can help?

She held both Murray Income Trust (MUT) and Perpetual Income & Growth (PLI). On 6th November 2020, as a result of a Corporate Action, the shares of PLI were merged into MUT. Thus the number of MUT shares in her account increased but no price of those shares is shown on her statement. So the question is, how do we calculate the average purchase price of her MUT shares?

I'm guessing that we will have to calculate the total purchase amount of all her PLI shares then divide that by the number of new MUT shares acquired. However, I'd like to know if that would be the correct method that would suffice for the HMRC.

The method you describe in the last paragraph is the way I have always done it. As long as you know how much money you invested, including any reinvested dividends and minus any sales proceeds, then you can always compute the average cost by dividing the number of shares into the amount invested. Whatever corporate actions that happened along the way do not really change that as long as they did not involve money in or out.

Also note that you do not necessarily ever need the average cost per share. You do not even have to report the number of shares sold, although the form does ask for that. All you really need is a number for the cost basis and then a number for the net proceeds. The gain or loss is the difference between them.

You will need to take account of the number of shares for a partial sale as you need to pro-rate the cost basis. But otherwise you can ignore it in every case I have seen, and HMRC really do not care if you do not provide it, just like they do not care if you leave the acquisition date blank.

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Re: Calculating CGT on shares after merger

#432311

Postby scrumpyjack » August 3rd, 2021, 6:52 pm

One reason I never go for a DRIP (dividend reinvestment). It makes an awful lot of working keeping records for CGT purposes. Really not worth the hassle (except perhaps in an ISA or other non taxable wrapper). It was a lot worse when indexation applied!

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Re: Calculating CGT on shares after merger

#432325

Postby RaspberryFool » August 3rd, 2021, 8:20 pm

One reason I never go for a DRIP (dividend reinvestment). It makes an awful lot of working keeping records for CGT purposes. Really not worth the hassle (except perhaps in an ISA or other non taxable wrapper).


It seemed like to best way to generate growth over time. I never imagined that we would be in a position to need to consider capital gains. Even if there were capital gains, I always assumed that the small amounts could easily be accommodated with a year's allowances. However, a recent health scare made me realise that my family might one day have to liquidate all our assets in one go, so they may as well know what is involved.

RF

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Re: Calculating CGT on shares after merger

#432397

Postby Nocton » August 4th, 2021, 9:03 am

I solve the problem by using a purpose-built program - in my case Investor 3 by Meridian (https://www.meridian-software.co.uk. Well worth the cost. I just enter all transactions including DRIP, and at the click of a button it does the calcs for my tax return. Much easier than a spreadsheet.

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Re: Calculating CGT on shares after merger

#432409

Postby Lootman » August 4th, 2021, 9:22 am

Nocton wrote:I solve the problem by using a purpose-built program - in my case Investor 3 by Meridian (https://www.meridian-software.co.uk. Well worth the cost. I just enter all transactions including DRIP, and at the click of a button it does the calcs for my tax return. Much easier than a spreadsheet.

I often think that people over-estimate the amount of record-keeping needed for CGT tax reporting. It is in fact remarkably simple: HMRC only requires you to report four data items in respect of each asset disposal. And two of those four data items are merely to identify the disposal and are not material to the CGT computation - the disposal date and an identification of the asset which was disposed.

Then the taxman needs the cost basis and the proceeds. And of those 4 data items, 3 are available from the contract note for the disposal. So in fact you can manage CGT tax reporting needs by keeping a record of just one piece of information - your cost basis.

So in my case I have no need of spreadsheets or software. I have a hand-written piece of paper with the cost basis of each taxable position that I hold. Upon a sale that is combined with the 3 items from the disposal contract note and, bingo, tax return done. No need for average cost per share and other derived numbers.

The problems arise if you have to continually update the cost basis, which is why DRIPs can be a problem, as can monthly savings plans with funds. Or if you are constantly trading in and out of an asset, or are unlucky enough to be subjected to multiple involuntary corporate actions. But even so, if you simply keep the cost basis updated, everything else can be pulled together later.

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Re: Calculating CGT on shares after merger

#432454

Postby scrumpyjack » August 4th, 2021, 11:46 am

Lootman wrote:
Nocton wrote:I solve the problem by using a purpose-built program - in my case Investor 3 by Meridian (https://www.meridian-software.co.uk. Well worth the cost. I just enter all transactions including DRIP, and at the click of a button it does the calcs for my tax return. Much easier than a spreadsheet.

I often think that people over-estimate the amount of record-keeping needed for CGT tax reporting. It is in fact remarkably simple: HMRC only requires you to report four data items in respect of each asset disposal. And two of those four data items are merely to identify the disposal and are not material to the CGT computation - the disposal date and an identification of the asset which was disposed.

Then the taxman needs the cost basis and the proceeds. And of those 4 data items, 3 are available from the contract note for the disposal. So in fact you can manage CGT tax reporting needs by keeping a record of just one piece of information - your cost basis.

So in my case I have no need of spreadsheets or software. I have a hand-written piece of paper with the cost basis of each taxable position that I hold. Upon a sale that is combined with the 3 items from the disposal contract note and, bingo, tax return done. No need for average cost per share and other derived numbers.

The problems arise if you have to continually update the cost basis, which is why DRIPs can be a problem, as can monthly savings plans with funds. Or if you are constantly trading in and out of an asset, or are unlucky enough to be subjected to multiple involuntary corporate actions. But even so, if you simply keep the cost basis updated, everything else can be pulled together later.


Yes it is a lot simpler now as everything is pooled and there is no indexation to calculate. I have programmed my own investment system which maintains all my records for multiple portfolios and churns out the dividend and CGT reports for the tax returns. Unfortunately the brokers I use have a lot of holdings with incorrect acquisition values as when I transfer from one broker to another they put in market value at the time of transfer as cost. Too much hassle to correct it. So I can't use broker schedules for CGT. I know HMRC are talking about getting all the info for tax returns directly from the brokers but in my case that would definitely give the wrong results for a number of reasons.

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Re: Calculating CGT on shares after merger

#432457

Postby Lootman » August 4th, 2021, 11:54 am

scrumpyjack wrote:
Lootman wrote:
Nocton wrote:I solve the problem by using a purpose-built program - in my case Investor 3 by Meridian (https://www.meridian-software.co.uk. Well worth the cost. I just enter all transactions including DRIP, and at the click of a button it does the calcs for my tax return. Much easier than a spreadsheet.

I often think that people over-estimate the amount of record-keeping needed for CGT tax reporting. It is in fact remarkably simple: HMRC only requires you to report four data items in respect of each asset disposal. And two of those four data items are merely to identify the disposal and are not material to the CGT computation - the disposal date and an identification of the asset which was disposed.

Then the taxman needs the cost basis and the proceeds. And of those 4 data items, 3 are available from the contract note for the disposal. So in fact you can manage CGT tax reporting needs by keeping a record of just one piece of information - your cost basis.

So in my case I have no need of spreadsheets or software. I have a hand-written piece of paper with the cost basis of each taxable position that I hold. Upon a sale that is combined with the 3 items from the disposal contract note and, bingo, tax return done. No need for average cost per share and other derived numbers.

The problems arise if you have to continually update the cost basis, which is why DRIPs can be a problem, as can monthly savings plans with funds. Or if you are constantly trading in and out of an asset, or are unlucky enough to be subjected to multiple involuntary corporate actions. But even so, if you simply keep the cost basis updated, everything else can be pulled together later.

Yes it is a lot simpler now as everything is pooled and there is no indexation to calculate. I have programmed my own investment system which maintains all my records for multiple portfolios and churns out the dividend and CGT reports for the tax returns. Unfortunately the brokers I use have a lot of holdings with incorrect acquisition values as when I transfer from one broker to another they put in market value at the time of transfer as cost. Too much hassle to correct it. So I can't use broker schedules for CGT. I know HMRC are talking about getting all the info for tax returns directly from the brokers but in my case that would definitely give the wrong results for a number of reasons.

Yes, the US equivalent of the consolidated tax certificate - the 1099 form - has not only the dividends and interest, but also the cost basis and proceeds for each closing transaction. So you basically just plug in those numbers into your tax return and you are done.

There are differences however since in the US average cost basis is just one option for investors, who can also nominate FIFO, LIFO, HIFO etc., which has to be allowed for.

And they do not have the silly UK rule that lots and positions across different brokers are pooled. So using the broker data in the UK would work best if you only have one broker for taxable investments!

The US method also relies on the cost basis info being correctly adjusted for corporate actions. UK brokers are a bit behind in that regard.

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Re: Calculating CGT on shares after merger

#432476

Postby pochisoldi » August 4th, 2021, 1:10 pm

Lootman wrote:
And they do not have the silly UK rule that lots and positions across different brokers are pooled. So using the broker data in the UK would work best if you only have one broker for taxable investments!


And if you never transfer holdings from one broker to another...

I recently did this and the historical cost changed to the value when the shares were transferred.

For the record, I use a spreadsheet to consolidate purchases and broker dividend reinvestments and create my "S104 pool".
Not a big deal for 6 dividend payments a year.

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Re: Calculating CGT on shares after merger

#432477

Postby Lootman » August 4th, 2021, 1:26 pm

pochisoldi wrote:
Lootman wrote:And they do not have the silly UK rule that lots and positions across different brokers are pooled. So using the broker data in the UK would work best if you only have one broker for taxable investments!

And if you never transfer holdings from one broker to another...

I recently did this and the historical cost changed to the value when the shares were transferred.

Yes, the way it works in the US is that if there is an inter-broker transfer then the sending broker is mandated to send the cost basis with all transferred positions. That is really the only way it can work.

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Re: Calculating CGT on shares after merger

#432506

Postby Gengulphus » August 4th, 2021, 3:35 pm

Lootman wrote:I often think that people over-estimate the amount of record-keeping needed for CGT tax reporting. It is in fact remarkably simple: HMRC only requires you to report four data items in respect of each asset disposal. And two of those four data items are merely to identify the disposal and are not material to the CGT computation - the disposal date and an identification of the asset which was disposed.

Then the taxman needs the cost basis and the proceeds. And of those 4 data items, 3 are available from the contract note for the disposal. So in fact you can manage CGT tax reporting needs by keeping a record of just one piece of information - your cost basis.

Careful! You're muddling two things up in that description: what record-keeping the taxpayer needs to do, and what they need to report to the taxman in their tax return. The latter is usually a summarised figure obtained from the former - not just for CGT but in plenty of other tax areas. For example, you report just one interest figure on UK bank accounts in your tax return, no matter how many UK bank accounts you have, but you're expected to keep the records listed in https://www.gov.uk/keeping-your-pay-tax ... d-pensions, which will include separate interest paid / tax deducted statements from each of the banks providing those accounts. And the purpose of keeping those records is not just to be able to produce the summarised figures in the tax return, but also to be prepared for the possibility that HMRC enquires into those figures - so the need for them doesn't vanish once you've submitted the tax return.

Similarly for CGT: the records you need to keep (for shares) are basically your contract notes (see https://www.gov.uk/capital-gains-tax/records) plus a few additions listed there, and I'd strongly suggest also keeping details of any corporate actions that have affected them (they're almost always a matter of public record and so not strictly needed - but they can sometimes be quite difficult to track down later). For each type of share, those records can be reduced to a 'state of play' of your CGT computation, which as long as you take care never to acquire that type of share in the 30 days following a day on which you disposed of it (*) consists of just:

* the gains and losses you've realised in the current tax year up to and including yesterday;
* the number of shares you owned at the start of today;
* the cost basis of those shares at the start of today;
* a list of any trades you've done in the shares today (they cannot reliably be reduced to a gain or loss until it's known that the list is complete).

But that isn't adequate record-keeping - it's just the current state of your CGT computation based on your records - like e.g. keeping a running total of UK interest would be.

(*) There is a similar 'state of play' of the CGT computation if you do acquire the type of share in the 30 days following a day on which you disposed of it, but it's rather messier to describe it well, and I'm not going to bother!

Lootman wrote:So in my case I have no need of spreadsheets or software. I have a hand-written piece of paper with the cost basis of each taxable position that I hold. Upon a sale that is combined with the 3 items from the disposal contract note and, bingo, tax return done. No need for average cost per share and other derived numbers.

Agreed about not trying to use average cost per share in your CGT computations: they're generally much simpler if you work in "N shares acquired for a total of £X" terms rather than "N shares acquired for an average of £X per share" terms. For example, compare the correct rules for merging two acquisitions:

* "N1 shares acquired for a total of £X1" and "N2 shares acquired for a total of £X2" combine to produce "N1+N2 shares acquired for a total of £X1+£X2".

* "N1 shares acquired for an average of £X1 per share" and "N2 shares acquired for an average of £X2 per share" combine to produce "N1+N2 shares acquired for an average of (N1*£X1+N2*£X2)/(N1+N2) per share".

They're mathematically equivalent, but the first requires just two additions, while the second requires two additions (or three if you fail to spot that two of them are the same), two multiplications and a division...

RaspberryFool wrote:She held both Murray Income Trust (MUT) and Perpetual Income & Growth (PLI). On 6th November 2020, as a result of a Corporate Action, the shares of PLI were merged into MUT. Thus the number of MUT shares in her account increased but no price of those shares is shown on her statement. So the question is, how do we calculate the average purchase price of her MUT shares?
I'm guessing that we will have to calculate the total purchase amount of all her PLI shares then divide that by the number of new MUT shares acquired. However, I'd like to know if that would be the correct method that would suffice for the HMRC.

You don't need to give HMRC an average purchase price per share! Look at HMRC's "Computation working sheet (for straightforward calculations)" on page 11 to 12 of their Capital Gains Tax summary notes and you'll find they basically want things reported in "N shares acquired for a total of £X" terms...

So basically, she's got her original number of MUT shares acquired for the total she paid for them, and the number of MUT shares that came out of the corporate action, acquired for the total she paid for the PLI shares that went into the corporate action. Use the fact that "N1 shares acquired for a total of £X1" and "N2 shares acquired for a total of £X2" combine to produce "N1+N2 shares acquired for a total of £X1+£X2" on those two.

There are a couple of caveats about that:

* The first is that if she received a small 'fractional entitlement' payment for the corporate action to reflect the fact that the conversion ratio would have resulted in her being entitled to a number of MUT shares that wasn't a whole number, she should adjust by deducting it from £X1+£X2. I really do mean "if", by the way: not all such corporate actions do such payments at all and the ones that do generally don't pay them when they're too small (typically if they're under £5). So it's not something I expect to have happened, but just something that might have happened.

* The second is that while looking to see whether this corporate action paid fractional entitlement payments (without success), I did notice that there was a "Cash Option", under which PLI shareholders were allowed to ask for some or all of their shares to become cash (i.e. effectively be sold) rather than MUT shares. The above assumes that your wife didn't use that option at all - if she did, that will change the answer, basically to "apportion the PLI shares into ones that became MUT shares and ones that became cash, merge the former into her original MUT shares as above, and calculate the capital gain or loss realised on the latter".

Gengulphus

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Re: Calculating CGT on shares after merger

#432553

Postby Lootman » August 4th, 2021, 10:11 pm

Gengulphus wrote:
Lootman wrote:I often think that people over-estimate the amount of record-keeping needed for CGT tax reporting. It is in fact remarkably simple: HMRC only requires you to report four data items in respect of each asset disposal. And two of those four data items are merely to identify the disposal and are not material to the CGT computation - the disposal date and an identification of the asset which was disposed.

Then the taxman needs the cost basis and the proceeds. And of those 4 data items, 3 are available from the contract note for the disposal. So in fact you can manage CGT tax reporting needs by keeping a record of just one piece of information - your cost basis.

Careful! You're muddling two things up in that description: what record-keeping the taxpayer needs to do, and what they need to report to the taxman in their tax return. The latter is usually a summarised figure obtained from the former - not just for CGT but in plenty of other tax areas. For example, you report just one interest figure on UK bank accounts in your tax return, no matter how many UK bank accounts you have, but you're expected to keep the records listed in https://www.gov.uk/keeping-your-pay-tax ... d-pensions, which will include separate interest paid / tax deducted statements from each of the banks providing those accounts. And the purpose of keeping those records is not just to be able to produce the summarised figures in the tax return, but also to be prepared for the possibility that HMRC enquires into those figures - so the need for them doesn't vanish once you've submitted the tax return.

The question of what you might need if HMRC decides that it does not believe what you put on your tax return is an entirely different question and one which I was not seeking to address.

And so, yes, I might concede that if HMRC investigates you then you will need to produce more information. That is definitional. However your records are meaningless as proof that your return is correct because, like your return, those records are created by you. And if HMRC think you lied on your return then they likely will think that your carefully compiled records are also lies. To satisfy HMRC you are going to have to go beyond your own compiled records and rather present independent records.

The baseline approach to reporting gains is as I described. If you get investigated then it is impossible to say what you might need to be asked to produce to satisfy them. It is just a matter of dealing with that if and when it arises.

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Re: Calculating CGT on shares after merger

#432577

Postby Gengulphus » August 5th, 2021, 6:06 am

Lootman wrote:
Gengulphus wrote:
Lootman wrote:I often think that people over-estimate the amount of record-keeping needed for CGT tax reporting. It is in fact remarkably simple: HMRC only requires you to report four data items in respect of each asset disposal. And two of those four data items are merely to identify the disposal and are not material to the CGT computation - the disposal date and an identification of the asset which was disposed.

Then the taxman needs the cost basis and the proceeds. And of those 4 data items, 3 are available from the contract note for the disposal. So in fact you can manage CGT tax reporting needs by keeping a record of just one piece of information - your cost basis.

Careful! You're muddling two things up in that description: what record-keeping the taxpayer needs to do, and what they need to report to the taxman in their tax return. The latter is usually a summarised figure obtained from the former - not just for CGT but in plenty of other tax areas. For example, you report just one interest figure on UK bank accounts in your tax return, no matter how many UK bank accounts you have, but you're expected to keep the records listed in https://www.gov.uk/keeping-your-pay-tax ... d-pensions, which will include separate interest paid / tax deducted statements from each of the banks providing those accounts. And the purpose of keeping those records is not just to be able to produce the summarised figures in the tax return, but also to be prepared for the possibility that HMRC enquires into those figures - so the need for them doesn't vanish once you've submitted the tax return.

The question of what you might need if HMRC decides that it does not believe what you put on your tax return is an entirely different question and one which I was not seeking to address.

And so, yes, I might concede that if HMRC investigates you then you will need to produce more information. That is definitional. However your records are meaningless as proof that your return is correct because, like your return, those records are created by you. And if HMRC think you lied on your return then they likely will think that your carefully compiled records are also lies. To satisfy HMRC you are going to have to go beyond your own compiled records and rather present independent records.

The HMRC links https://www.gov.uk/keeping-your-pay-tax ... d-pensions (in your quote from my post) and https://www.gov.uk/capital-gains-tax/records (shortly afterwards in that post) both tell you about records you need to keep, and the items they list are not ones that are created by the taxpayer - they are independently-produced. You don't need to keep any records created by you - not even the cost bases of your shareholdings that you mention, since they can be recalculated as and when needed from the independent records you do need to keep. Doing such recalculations each time you sell shares and need to know what gain or lose to report in your tax return, and quite possibly also each time you contemplate selling shares and want to know what the CGT consequences would be, would of course be a tremendously inefficient use of your time... But it's entirely your choice what records you keep of the results (both intermediate and final) of your CGT computations - the need imposed by tax law and HMRC is to keep records of the independently-produced inputs to those computations.

The result is that I entirely agree with you that it's sensible to keep track of the cost bases of your shareholdings, and that doing so normally makes preparing the CGT part of your tax return a lot simpler than many people imagine (*). But I disagree with you, and more important, HMRC disagrees with you, about what records you need to keep: e.g. the records you keep do need to include things like contract notes and don't need to include figures you've calculated yourself such as those cost bases.

Or put another way, it's basically just the word "record-keeping" at the start of the deepest quote above that I was saying "Careful!" about. There's a legal obligation to keep tax records, and someone who only keeps records of the cost bases of their shareholdings will fail to meet that obligation. So what you said could mislead people about what they need to keep records of... Given the existence of that obligation, what you called "record-keeping" should really be called something else, though I'm uncertain what - perhaps "CGT status-tracking"?

(*) The problem with CGT tax reporting for shares isn't that the computations themselves are especially complex, but rather the complexity of the rules about which computations you should do. And the process of applying those rules and doing the computations they indicate for each sale can be very tedious, especially if one does any significant amount of share trading (it's not just that there are more sales to process - it's also that the likelihood of '30-day rule' complexities affecting each individual sale goes up).

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Re: Calculating CGT on shares after merger

#432589

Postby Lootman » August 5th, 2021, 7:39 am

Gengulphus wrote:I disagree with you, and more important, HMRC disagrees with you, about what records you need to keep: e.g. the records you keep do need to include things like contract notes and don't need to include figures you've calculated yourself such as those cost bases.

There's a legal obligation to keep tax records, and someone who only keeps records of the cost bases of their shareholdings will fail to meet that obligation.

I was not aware that HMRC has rules about what records you should keep. That said I think it is unlikely that you would be fined merely for not having those records. Rather that if you are being investigated then you will have a more difficult job satisfying their requests. I can certainly imagine that I might have to scratch around a fair bit if I were asked about some of my older transactions. For example I do not keep printouts of contract notes but rather I rely on being able to find them online on my broker's site if I ever needed to, which has been never so far.

Another aspect of that is that HMRC might be more likely to believe you if you have complete and well-organised records. Whereas someone like me with just a hand-written list of cost bases might come across as sloppy and therefore possibly, in their eyes, a person more likely to make a mistake or play games.

On the other hand perhaps if someone were going to fiddle their CGT declarations then they might deem it wise to have some impeccable looking records replete with sophisticated looking spreadsheets, and hope that nobody looks at them too closely.

One thing you can do to simplify record-keeping is to keep all complexity out of taxable accounts. I no longer hold any of these in a taxable account:

ETFs, because of the excess reportable income complication
Foreign securities
DRIPs and regular investing, as noted upthread
Ordinary shares because of the greater risk of involuntary corporate actions

At this point I only have about 15 taxable positions, each very large, which are not traded. I sell one a year which more than utilises my annual CGT-free allowance. So if there was an investigation it would probably be about just one position and disposal, and I am confident I could answer their questions after some research, even with no records as you noted. If after that they fine me for not keeping proper records then so be it, but I deem that unlikely.

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Re: Calculating CGT on shares after merger

#432623

Postby scrumpyjack » August 5th, 2021, 9:14 am

I was once asked for copies of contract notes by HMRC. That was when the Chancellor increased the rate of CGT in the middle of a tax year. I thought it was coming and made some disposals 2 days before the announcement. Obviously the tax man was suspicious of my good timing! No problem - I had the contract notes and provided the proof.

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Re: Calculating CGT on shares after merger

#432628

Postby Lootman » August 5th, 2021, 9:19 am

scrumpyjack wrote:I was once asked for copies of contract notes by HMRC. That was when the Chancellor increased the rate of CGT in the middle of a tax year. I thought it was coming and made some disposals 2 days before the announcement. Obviously the tax man was suspicious of my good timing! No problem - I had the contract notes and provided the proof.

Yes I would have thought the issue is not what records you keep but rather what records you can produce if asked to.

It is also possible that HMRC might bypass the individual taxpayer anyway and go directly to your broker for the information they need.

As long as I am confident I can get those contract notes off my broker's site then I have no real need to have a box full of paperwork just in case. I've been investing for nearly 40 years and have probably made thousands of trades. The idea of having boxes full of paper for all of them fills me with dread.

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Re: Calculating CGT on shares after merger

#432640

Postby scrumpyjack » August 5th, 2021, 9:58 am

Lootman wrote:
scrumpyjack wrote:I was once asked for copies of contract notes by HMRC. That was when the Chancellor increased the rate of CGT in the middle of a tax year. I thought it was coming and made some disposals 2 days before the announcement. Obviously the tax man was suspicious of my good timing! No problem - I had the contract notes and provided the proof.

Yes I would have thought the issue is not what records you keep but rather what records you can produce if asked to.

It is also possible that HMRC might bypass the individual taxpayer anyway and go directly to your broker for the information they need.

As long as I am confident I can get those contract notes off my broker's site then I have no real need to have a box full of paperwork just in case. I've been investing for nearly 40 years and have probably made thousands of trades. The idea of having boxes full of paper for all of them fills me with dread.


I download them to PDF periodically. If you change broker and then a few years later can't login to get copies, that could be a problem.

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Re: Calculating CGT on shares after merger

#432668

Postby Lootman » August 5th, 2021, 12:01 pm

scrumpyjack wrote:
Lootman wrote:
scrumpyjack wrote:I was once asked for copies of contract notes by HMRC. That was when the Chancellor increased the rate of CGT in the middle of a tax year. I thought it was coming and made some disposals 2 days before the announcement. Obviously the tax man was suspicious of my good timing! No problem - I had the contract notes and provided the proof.

Yes I would have thought the issue is not what records you keep but rather what records you can produce if asked to.

It is also possible that HMRC might bypass the individual taxpayer anyway and go directly to your broker for the information they need.

As long as I am confident I can get those contract notes off my broker's site then I have no real need to have a box full of paperwork just in case. I've been investing for nearly 40 years and have probably made thousands of trades. The idea of having boxes full of paper for all of them fills me with dread.

I download them to PDF periodically. If you change broker and then a few years later can't login to get copies, that could be a problem.

Yeah I can imagine that. My taxable account has been with the same broker since the 1990s so no such problem, yet.

Worst case you could contact an old broker and beg them for copies of past trades. They might charge you for that but would surely oblige. Would make sense to download them all if I ever switch, at least for the open positions.

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Re: Calculating CGT on shares after merger

#432760

Postby jaizan » August 5th, 2021, 7:17 pm

pochisoldi wrote:
Lootman wrote:And if you never transfer holdings from one broker to another...
I recently did this and the historical cost changed to the value when the shares were transferred.
For the record, I use a spreadsheet to consolidate purchases and broker dividend reinvestments and create my "S104 pool".
Not a big deal for 6 dividend payments a year.


I've currently got 3 UK taxable broker accounts, although this should eventually be rationalized as I sell off the holdings to live and fund the ISA.

As a result, some positions might be split among more than one broker account. Fortunately, I have one Excel file which contains every share trade ever, which makes it easy to calculate the total cost across all accounts for CGT.
I make sure annual sales are kept below the annual gains limit and also below the sales limit of 4x that, so I do not have to report the detail. Everything is totally legal, but I like a simple tax return !

I had a brief flirtation with automatic dividend reinvestment some years ago, but am glad I stopped that as it just clogs up records with small trades.

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Re: Calculating CGT on shares after merger

#432772

Postby Gengulphus » August 5th, 2021, 8:52 pm

Lootman wrote:
Gengulphus wrote:I disagree with you, and more important, HMRC disagrees with you, about what records you need to keep: e.g. the records you keep do need to include things like contract notes and don't need to include figures you've calculated yourself such as those cost bases.

There's a legal obligation to keep tax records, and someone who only keeps records of the cost bases of their shareholdings will fail to meet that obligation.

I was not aware that HMRC has rules about what records you should keep. ...

Well, you are now! The HMRC links I provided establish that... Those links are of course executive summaries of the relevant tax law (plus very likely added HMRC guidance about how to adhere to that law and be able to establish that you've adhered to it). I don't know anything like all the details of that tax law - but the HMRC manual page SALF203 contains a summary of it and the SALF211 page from the same manual rather more details. And chasing up the references to section 12B in those links indicates that it is section 12B of the Taxes Management Act 1970, which appears to be the basic legal framework - though pretty clearly not the full details, as its clause (3A) allows HMRC to make regulations adding further details, and of course it's quite conceivable that further details have been added by subsequent legislation.

Lootman wrote:... That said I think it is unlikely that you would be fined merely for not having those records. ...

Agreed that it's unlikely that you would be fined just for not being able to produce a required record or two - not impossible, but I think the penalty would be restricted a "take more care in future" slap on the wrist in most cases. That's not just about what seems likely to me - it's also based on the following quote from the SALF211 link above:

A penalty of up to £3,000 may be charged for each failure to keep or to preserve adequate records in support of a tax return.

Where record keeping failures come to light during the course of HMRC enquiries, they are likely to be a factor to be taken into consideration in determining the extent to which any penalties are to be abated in respect of other offences, for example, where incorrect accounts have been submitted and a penalty is sought under Schedule 24 FA 2007. A penalty under Section 12B(5) will normally be sought only in serious cases, for example, where there has been a history of record-keeping failures or records have been destroyed deliberately to obstruct an enquiry. The amount of any penalty will depend on the nature of the offence.

The taxpayer has the right of appeal against the determination of any such penalty.

And it's really pretty obvious that penalties for not keeping required tax records are an essential part of the system - otherwise tax evaders could simply adopt a policy of never keeping any such records and replying "Sorry, cannot help" to any request for records from HMRC without penalty. (And if anyone is tempted by the idea of 'losing' their tax records for a penalty of no more than £3k, they should note that that limit is for each failure!)

Lootman wrote:... Rather that if you are being investigated then you will have a more difficult job satisfying their requests. I can certainly imagine that I might have to scratch around a fair bit if I were asked about some of my older transactions. For example I do not keep printouts of contract notes but rather I rely on being able to find them online on my broker's site if I ever needed to, which has been never so far.

A somewhat risky policy, as brokers are not obliged to keep contract notes available forever - and their policies differ quite markedly on how long they keep them available. I've just done a quick survey of my four brokers and found that:

* The one I've been with longest (since about December 1999) only has contract notes available on their website going back to August 2019.

* The one I've been with second longest has contract notes available on their website all the way back to November 2002, which is when I opened the account. (Though a bit aggravatingly, they've only shifted to making them available in easy-to-archive-as-a-single-file PDF form in recent years - the older ones are only available as HTML and need embedded images, etc, to be archived as well to be able to display them if the broker's website is unavailable.)

* The third originated in an account I opened in December 2003, but has twice been transferred to another broker due to the broker exiting the business since then. Earlier contract notes don't appear to have been transferred the first time, but were the second time - and the current broker has kept all contract notes available on their website back to November 2009 (the time of the first transfer) but no earlier.

* The fourth originated in an account I opened in April 2007, but was transferred to another broker in late 2014 (again at the previous broker's instigation, due to them exiting the business). Contract notes are available on the current broker's website back to July 2016, though some (not all) details of them are available from the cash statements available on that website, which go back as far as the transfer (but no further).

It's of course conceivable that the first, third and fourth of those brokers still have earlier contract notes available in their internal company records, and could supply copies of them on request (and doubtless the payment of an administration fee!). But I don't think it all that likely, especially for the older contract notes. And in the case of contract notes from before November 2009 for the third account (i.e. those produced by the original broker), that broker has since been dissolved as a company - so I definitely cannot those contract notes from that broker... Fortunately, I took copies of them at the time and still have them in my records, so I don't expect to need to even if HMRC were to enquire into a CGT computation to which they are relevant.

In short, relying on being able to find contract notes on one's broker's site has its risks, and they'll probably be highest for one's oldest transactions. I'm not saying that you personally need to be worried about those risks - your broker might be like my second broker, keeping contract notes available apparently forever, though note that their policy might be just to keep them available for a large number of years (e.g. on the evidence I've got, I don't know whether my second broker keeps them available or just for 20 years) and that companies can change their policies. But I am saying that it's for each reader to assess for themselves to what extent they can rely on their broker keeping contract notes available, and that different readers may come to very different assessments, not just for subjective reasons such as how risk-averse they are, but also for objective reasons to do with using different brokers.

And by the way, I also don't make printouts of contract notes - I did in the past, but stopped doing so many years ago. Paper records also have their risks, as an episode with a burst water pipe taught me back then, and they're ridiculously bulky compared with electronic records... What I do instead is download my brokers' contract notes to my computer's hard disk and regularly back that hard disk up. The chances of the contract notes being lost from all of the relevant broker account, my computer and the back-ups are extremely low. And while the downloading of the contract notes does take a small amount of time, I reckon I get it back due to being able to concentrate on doing my CGT computations without the interruptions of finding myself timed out of broker accounts due to needing to dig out details of corporate actions, etc.

Lootman wrote:Another aspect of that is that HMRC might be more likely to believe you if you have complete and well-organised records. Whereas someone like me with just a hand-written list of cost bases might come across as sloppy and therefore possibly, in their eyes, a person more likely to make a mistake or play games.

On the other hand perhaps if someone were going to fiddle their CGT declarations then they might deem it wise to have some impeccable looking records replete with sophisticated looking spreadsheets, and hope that nobody looks at them too closely.

I suspect that HMRC would actually regard 'sophistication' they see in spreadsheets as a "possibly a smokescreen?" warning flag, so that if they look at CGT computations at all (which they almost certainly don't in most cases) it makes them more inclined to look closely. It's certainly the first reaction my suspicious mind would come up with if I were a tax inspector and saw unnecessary 'sophisticated' features in a taxpayer's CGT computations...

Which is not to say that it's a bad idea to have some sophistication in one's spreadsheets - but I think it's probably better not to present that sophistication to HMRC. For example, the parts of my CGT spreadsheets that I save as a PDF and attach to my tax return just contain a computation for each type of share I've sold during the year that:

* Starts with some standard 'header' information - which company's shares it's about (or occasionally multiple companies, when a demerger is involved), which tax year it's for, my name and tax reference, and the short identification code(s) I use for the exact class(es) of share involved.

* Starts with the CGT status of my existing holding just after I last needed to report gains/losses on it, plus a list of the transactions I've made to date that weren't used in that previous report and are needed in the computation of the year's gains and losses - i.e. basically the transactions I've made between the end of the tax year that previous report was about and the end of the tax year I'm reporting on, but that basic description can need adjusting if the 30-day rule rears its ugly head (a situation I try to avoid, but have occasionally been known to make a mistake about...). Or if I've never reported on the type of share before, just a list of all the transactions I've made to date that are needed in the computations of the year's gains and losses, which is basically just the transactions I've made up to the end of the tax year I'm reporting on, with a similar proviso about the 30-day rule.

* Continues with a step-by-step account of the merges, apportionments, adjustments, etc, that I've done to transform that the raw data into the matched pairs of acquisitions and disposals from which the gains and losses are calculated and the holding (if any) that remains to be carried forward into future tax years.

* Ends with the list of subtractions on the matched pairs of acquisitions and disposals to produce the capital gains and losses, and an explicit identification of the holding carried forward into future tax years (if it exists).

plus a final "Schedule of gains and losses" list that pulls together all the gains and losses realised in those individual-share computations and adds up the totals required by the tax return.

In many cases, by the way, that description of the individual-share computations makes them sound more complex than they actually are - for example, a simple "buy a holding, later sell the entire holding with no intervening corporate actions" computation becomes just the standard header information in the first of those sections, a list of the buy and the sell in the second, an empty/omitted third section, and the subtraction to produce the gain or loss in the fourth.

There's nothing in that that I expect to strike a tax inspector as sophisticated - it's just a straight account of CGT computations done according to the rules. (Or to be precise, according to what I think are the rules - but if I get them wrong, I'd much rather that a tax inspector sees what I've done and what I did wrong, than that I get asked months after I did the computation "How did you come up with this figure?" and very probably have to spend a lot of time working out the answer or even having to confess myself stumped... My purpose in producing a step-by-step account of the computation is as much to be able to remind myself (if needed) as to inform HMRC about the calculation I did!)

That doesn't mean that my spreadsheet lacks any reasonably sophisticated features. It has quite a few, many of them to detect and highlight common errors I make in using it. For instance, most typos in entering details from a contract note into the spreadsheet will result in the data entered being highlighted with a red background; if I try to get it to calculate a gain or loss from an acquisition and a disposal that fail to match on type of share or number of shares, the result will be a "*Error*" against a red background; a "Checks" worksheet (which isn't one of the parts of the overall spreadsheet that get saved as a PDF and attached to my tax return) similarly highlights failures to pass some consistency checks; the spreadsheet's standard block of formulae to do an apportionment takes care to make the portions add up precisely to the transaction being apportioned, to avoid rounding errors causing consistency check failures; etc, etc, etc. But as long as I remember to skim through the PDF I attach to my tax return checking it contains no red background before submitting the tax return, none of those more sophisticated features will be at all visible to HMRC, who will just see the straight account of the CGT computations I've done.

Lootman wrote:One thing you can do to simplify record-keeping is to keep all complexity out of taxable accounts. I no longer hold any of these in a taxable account:

ETFs, because of the excess reportable income complication
Foreign securities
DRIPs and regular investing, as noted upthread
Ordinary shares because of the greater risk of involuntary corporate actions

At this point I only have about 15 taxable positions, each very large, which are not traded. I sell one a year which more than utilises my annual CGT-free allowance. So if there was an investigation it would probably be about just one position and disposal, and I am confident I could answer their questions after some research, even with no records as you noted. If after that they fine me for not keeping proper records then so be it, but I deem that unlikely.

Yes, a reasonable approach, as long as one is willing to accept a few drawbacks, such as that its choice of which investments to put in tax-sheltered accounts might not be optimal (e.g. ISAs generally don't shelter one from withholding taxes on foreign security dividends when they would on UK security dividends, thus wasting part of the benefit of the tax shelter) and that it has a "tax tail wagging the investment dog" aspect, especially if the fraction of one's wealth that one has been able to get into tax-sheltered accounts is fairly small. In my case, confining ordinary shares to tax-sheltered accounts would have a big "tax tail wagging the investment dog" aspect, due to my use of a HYP strategy. (And just in case anyone feels I need to be told that there are other types of strategy that I could use, I don't - I already know it! And I'm aware of some of those other types of strategy, and will ask on a more appropriate board than this one if and when I want to know more about them.)

But in my case, there's quite a big drawback, namely the sheer size of the unrealised capital gains currently on the holdings in my taxable accounts. Any way of moving capital from them into other types of holding will realise massive capital gains, so simplifying my CGT position along the lines you suggest would involve either paying a lot of CGT in the near future if I want to get there at all quickly, or taking many years about it (and still paying quite a lot of CGT per year), or making a lot of use of various CGT mitigation measures (all of which have limits on their use, drawbacks of their own and/or conditions I would find unacceptable).

Yes, I know such large unrealised capital gains are a nice problem to have! And I'm not complaining about it - just explaining why the approach you describe towards simplifying CGT record-keeping and computations would present me with some decidedly difficult decisions to make. I do agree with your general suggestion of simplifying the investments held and how they're held, and indeed have been doing some simplifying over the last year or two and intend to do more - but I don't expect to be able to get anywhere near the level of simplicity you describe before the end of my life without some pretty seriously painful contact with the CGT nettle...

Gengulphus


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