Example (continued):
The current unit price for the ABC UK Equity OEIC is £4.74 a share. The gain per share if Dan sells part of his holding is £4.74 - £2.24 = £2.50 per share
Step 3 – Calculate the number of shares to be sold
Once you have the gain per share it is simply a case of dividing the available exemption by the gain per share to determine the number of shares to be sold.
Example (continued):
Dan hasn’t made any other disposals in the current tax year and has the full annual exemption available of £12,300. To make full use of his annual exemption this year he will need to sell:
£12,300/£2.50 = 4,920 share
4,920 shares at the current market price of £4.74 a share will mean he will surrender £23,320 of his portfolio with a gain £12,300.
Adjusting the acquisition cost
The acquisition cost may need to be adjusted when income distributions are reinvested.
Accumulation shares vs income shares
Investors in accumulation shares don't receive income distributions from their fund. The income is automatically reinvested within the fund, inflating the share price. But the reinvested amounts are also added to the pooled cost, reducing the gain when shares are sold.
Example (continued):
Let’s assume Dan had purchased ‘accumulation’ shares in ABC UK Equity Oeic instead of ‘income’ shares. Over the term of the investment, the total income reinvested equates to £8,000.
The gain calculated above needs to be adjusted. Dan paid £112,000 in total for 50,000 shares.
By adding the reinvested income of £8,000 to the acquisition cost this increases the average acquisition cost to £2.40 per share: (£112,000 + £8,000) / 50,000 = £2.40.
Therefore, based on the current market price of £4.74 a share, the gain per share is reduced to £2.34 (£4.74 - £2.40).
In comparison, income shares distribute income as either interest or dividends. There is no adjustment needed for CGT if the income is paid to the investor and not rolled up within the fund; however the impact of equalisation payments should be factored in.
However, some investors may choose to have their income reinvested and this is achieved by purchasing additional shares/units in the fund.
Each new purchase will be added to the section 104 pool and will affect the average cost used when shares are sold. This means that, to accurately calculate the gain, the number of shares purchased and their cost for each income distribution will need to be identified.
Equalisation payments
There are fixed dates when income shares pay out. A new investor who invests between distribution dates (but before the ex-dividend date) will still receive the full distribution for the period, even though they were only invested for part of the period for which it relates.
The investor is only assessable to income tax on the part of the payment which reflects their period of ownership. The balance is treated as a return of their original capital and is known as an ‘equalisation payment’. This amount is not taxable but has the effect of lowering the acquisition cost of the shares purchased.
