Example 1

‘Free’ shares only

Mr. A acquired 450 ‘free’ First Active shares in 1998. In addition he acquired 45 loyalty shares, at no cost, during 1999 and 2000. On the acquisition of First Active by the Royal Bank of Scotland he received a cash payment of €3,069. His computation of capital gains tax for 2004 is as follows, assuming he has no other chargeable disposals or unused prior year losses.

Note 1

As the shares were acquired at no cost they have a ‘nil’ base cost.

Note 2

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 3

The tax is payable on or before 31/10/2004. If Mr. A disposes of other assets during the 9 months to 30/9/2004, his calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 2

Purchased shares only and unused losses.

Ms. B purchased 5000 shares in First Active on 1/7/2000 for €12,500. In June 2003, as a result of an approved capital reduction scheme, she received €5,600 from First Active. This reduction was effected by the issue, and subsequent cancellation, of bonus shares to existing First Active shareholders. Ms. B has a loss of €2,733 on this transaction for 2003, calculated as follows:

Note 1

As part of the capital reduction scheme each First Active shareholder received 2 bonus shares, at no cost, for each share held. Accordingly, Ms. B received 10,000 shares at no additional cost. For capital gains tax purposes, however, these shares are deemed to have a cost which is in proportion to the cost of the original holding ie, €12,500 × 10000/15000.

Note 2

Assuming she had no other chargeable gains in 2003, Ms. B can offset this loss against future chargeable gains.

In January 2004 Ms. B received €31,000 on the acquisition of First Active by the Royal Bank of Scotland. In addition to her First Active losses of €2,733 she has other unused losses of €750. Her computation of capital gains tax for 2004 is as follows, assuming she has no other chargeable disposals or unused prior year losses.

Note 3

The shares were purchased for €12,500. Part of this amount i.e., €8,333, was utilised in 2003 and the balance of €4,167, after adjustment for inflation, is deducted in calculating the 2004 gain. The inflation multiplier, 1.144, is applied to the allowable cost (€4,167 × 1.144).

Note 4

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 5

This tax is payable on or before 31/10/2004. If Ms. B disposes of other assets during the 9 months to 30/9/2004, her calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 3

‘Free’ shares only and unused losses.

Mr. E acquired 450 ‘free’ First Active shares in 1998. In addition he acquired 45 loyalty shares, at no cost, during 1999 and 2000. In June 2003, as a result of an approved capital reduction scheme, he received €554 from First Active. He had unused losses of €800. His computation of chargeable gains tax for 2003 is as follows, assuming he had no other chargeable disposals in that year.

On the acquisition of First Active by the Royal Bank of Scotland Mr. E received a cash payment of €3,069. His computation of capital gains tax for 2004 is as follows, assuming he has no other chargeable disposals.

Note 1

As the shares were acquired at no cost they have a ‘nil’ base cost.

Note 2

This is the balance of the losses (800 - 554).

Note 3

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 4

The tax is payable on or before 31/10/2004.

If Mr. E disposes of other assets during the 9 months to 30/9/2004, his calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 4

Mixture of ‘free’ and purchased shares acquired on the same date.

Mr. C acquired 450 ‘free’ First Active shares on flotation in October 1998. In addition, he purchased 800 shares for €2,300 at the same time. Subsequently, he received 45 loyalty shares during 1999 and 2000. In June 2003, as a result of an approved capital reduction scheme, he received €1,450 from First Active. For capital gains tax purposes his allowable expenditure was €1,188 (see Note 1).

Note 1

As part of the capital reduction scheme each First Active shareholder received 2 bonus shares, at no cost, for each share held. These shares are deemed to have acquired at the same date as the original holding. Accordingly, Mr. C received 2,590 shares at no additional cost. For capital gains tax purposes, shares of the same class are treated as being disposed of on a ‘first in first out’ basis where they were acquired at different dates. Difficulties can arise where, on flotation, an individual bought shares and acquired ‘free’ shares and, in these circumstances, Revenue accept that the shareholder may nominate the block of shares from which the disposal has been made. In this example the ‘free’ shares were disposed of first.

Mr. C disposed of 2,590 shares which comprised 1,350 ‘free’ shares with no attaching costs and 1,240 shares with an aggregate cost of €1,188 (2300 × 1240/2400). The unused costs of €1,112 are carried forward.

In January 2004 Mr. C received €8,029 on the acquisition of First Active by the Royal Bank of Scotland. His computation of capital gains tax for 2004 is as follows, assuming he has no other chargeable disposals or unused prior year losses.

Note 2

The shares were purchased for €2,300. Part of this amount ie, €1,188, was utilised in 2003 and the balance of €1,112, after adjustment for inflation, is deducted in calculating the 2004 gain. The inflation multiplier, 1.212, is applied to the allowable cost (€1,112 × 1.212).

Note 3

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 4

This tax is payable on or before 31/10/2004. If Mr. C disposes of other assets during the 9 months to 30/9/2004, his calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 5

Mixture of ‘free’ and purchased shares acquired at different dates.

Ms. D acquired 450 ‘free’ First Active shares on flotation in October 1998. She subsequently received 45 loyalty shares during 1999 and 2000. In July 2001 she purchased 7,000 shares for €17,500. In June 2003, as a result of an approved capital reduction scheme, she received €8,394 from First Active. Ms. D has a loss of €2,860 on this transaction for 2003, calculated as follows:

Note 1

As part of the capital reduction scheme each First Active shareholder received 2 bonus shares, at no cost, for each share held. Accordingly, Ms. D received 14,990 shares at no additional cost. These shares are deemed to have been acquired at the same date as the original holding. For capital gains tax purposes, shares of the same class are treated as being disposed of on a ‘first in first out’ basis where they were acquired at different dates. Ms. D disposed of 14,990 shares which comprised 1485 ‘free’ shares with no attaching costs and 13,505 shares with an aggregate cost of €11,254 (17,500 × 13505/21000). The unused costs of €6,246 are carried forward.

Note 2

Assuming she had no other chargeable gains in 2003, Ms. D can offset this loss against future chargeable gains.

In January 2004 Ms. D received €46,469 on the acquisition of First Active by the Royal Bank of Scotland. Her computation of capital gains tax for 2004 is as follows, assuming she has no other chargeable disposals or unused prior year losses.

Note 3

The shares were purchased for €17,500. Part of this amount ie, €11,254, was utilised in 2003 and the balance of €6,246, after adjustment for inflation, is deducted in calculating the 2004 gain. The inflation multiplier, 1.087, is applied to the allowable cost (€6,246 × 1.087).

Note 4

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 5

This tax is payable on or before 31/10/2004. If Ms. D disposes of other assets during the 9 months to 30/9/2004, her calculation of tax payable will be based on the aggregate of all disposals in that period.

The following articles, which appeared in previous issues of Tax Briefing may be of assistance when preparing your clients’ capital gains tax return for 2003:

Jefferson Smurfit Shares (takeover by MDCP Acquisitions Ltd) Tax Briefing Issue 53 (August 2003)

First Active plc (Repayment of capital )Tax Briefing Issue 53 (August 2003)

Eircom Shares (Calculation of Base Cost) Tax Briefing Issue 46 (December 2001).