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Sale of shares – food for thought

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It may seem obvious but selling shares in a company will generate either a gain or a loss, which means you need to think about Capital Gains Tax. 

Calculating the capital gain on shares sales is very straightforward.

Proceeds of sale                            P

Less: Costs of acquisition             (C)

Capital gain                                   G


The tricky bit can be identifying the original cost of the shares. Let’s work through the following example.

Suppose you bought 12,000 shares in Tesco as follows:

7 June 1989                           2,000 shares                     £3,000 cost

4 November 1992                  2,500 shares                     £5,000 cost

26 August 1997                      2,500 shares                     £8,000 cost

7 July 1998                            3,000 shares                     £13,000 cost

14 May 2006                          2,000 shares                     £7,000 cost


On 1 July 2018 you sell 4,500 shares for £24,500

Question: In this scenario, what cost do we allocate against the sale?

Simple logic might say the answer is £8,000. That was the cost of the first 4,500 shares we bought in 1989 and 1992… as you have probably guessed, this is incorrect.

From a Capital Gains Tax perspective, when shares of the same class, in the same company, are purchased on different dates, they form a ‘tax pool’. This means that they’re not treated as separate purchases but instead as one big holding with a cost equivalent to the accumulated individual purchases.

In our example, we have a holding of 12,000 shares, which has a cost of £36,000.

So, on average, each share held in Tesco effectively costs £3.

This means that if you sell 4,500 shares then the cost of the shares sold is actually £13,500 and you have a reportable profit of £11,000 (£24,500 sales proceeds less £13,500 cost).

For tax year 2018/19, the Capital Gains Annual Exemption is £11,700. In general, any gains need to be reported on your tax return, unless your total gains are less than this amount and you will not be required to pay any tax. 

This led to an interesting practice known as ‘bed and breakfasting.’ People started to sell shares and realise a capital gain, then buy the shares back again in a very short space of time. This allowed them to use their annual exemption each year and effectively re­set the base cost of these shares at a higher value. Any future gains would be based on the new cost, therefore restricting any future gains made.

Anti-avoidance rules stop this practice. If shares in a company are sold and then repurchased on the same day or the next 30 days then these transactions are matched. 

Returning to our Tesco example, let’s say that 4,500 shares were then repurchased on 12 July for £24,700.

The anti-avoidance rules would kick in and change our initial calculation, so the position would now be:

Proceeds of sale                            24,500

Less: Costs of acquisition              (24,700)    (under the share matching rules)

Capital loss                                   (    200)


If the number of shares purchased in the following 30 day period isn’t an exact match to the number sold then two separate calculations and some apportionments can be required.

If you think that you might fall foul of the bed and breakfasting rules or would like any further guidance around Capital Gains Tax in general, please contact a member of our specialist tax team on 0330 024 0888.


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Larking Gowen

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