Business Tax - Help please about individual shares & Deferred gain

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Jayney
Jayney Registered Posts: 21 New contributor 🐸
in AAT Level 4 (Level 8 in Scotland)
Hi I wonder if anyone can help? Osborne Books does not always explain things clearly & I always come unstuck using the workbook because a question turns up that is not demonstrated in the Tutorial.

The first query:

Adam purchased & sold shares in Beeco Ltd as follows:

15/4/05 Purchased 5600 shares for £14,560
12/1/15 Sold 1400 shares for £4,060
1/2/15 Purchased 2800 shares for £6,160
31/3/15 Sold 7,000 shares for £20,000

a. What is the gain or loss on sale of share on 12/1/15?
b. What is the gain or loss of shares on 31/3/15

The second query:

Poppy Price is a sole trader - she purchased a warehouse in October 2002 for £280,000 & sold it in April 2014 for £430,000 She purchased a shop in October for £390,000. I understand sale proceeds, cost etc but not how the deferred gain is £110,000. Also how the cost of the shop would be £280,000 when ultimately sold.

Thanks in advance

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  • CeeJaySix
    CeeJaySix Registered Posts: 645
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    Q1.

    Shares sales are matched with purchases on the same day, then in the following 30 days, then the remaining pool.

    The sale 12/01/15 sale is therefore matched against the purchase on 01/02/15 (within 30 days).

    Proceeds = £4,060 / 1400 = £2.90 per share
    Cost = £6,160 / 2800 = £2.20 per share
    Gain = (£2.90 - £2.20) x 1400 = £980

    This leaves (5600 + (2800 - 1400)) = 7000 shares in the pool, against which the second sale should be matched as it does not meet either of the other two criteria.

    The average share cost in the pool is (£14,560 + (£6160 / 2800 x 1400)) / 7000 = £2.52

    being all the first purchase plus the remaining 1400 unsold of the second purchase.

    Gain on second sale therefore £20,000 - (7000 x £2.52) = £2,360.



    Q2.

    Total gain = £430k - £280k = £150k.

    You can only defer the portion that is reinvested in the new property. In this case, proceeds were £430k, but only £390k was reinvested, so £40k of the gain is taxable now, leaving £110k to defer.

    If it makes it easier, just think that HMRC want tax once you have the cash; if you reinvest all the cash, you don't have anything to pay HMRC with.

    When deferring gains, the new property inherits the cost of the old. If it didn't, HMRC would lose out on tax. If you think you've made £150k profit now but only paid tax on £40k of it, but then when you eventually sell the new property you use a cost of £390k, when would the remaining £110k that you have deferred get taxed?

  • Jayney
    Jayney Registered Posts: 21 New contributor 🐸
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    Many thanks for explaining this to me - much appreciated.
  • Ana
    Ana Registered Posts: 10
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    Thanks very much for this explanation, very helpful.

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