ACCA F6 FA09 Study Text 2010

Chapter 18: Chargeable gains of a company

Shares in the first two categories never enter the pool and no indexation is available

on their disposal.

4.3 The share pool

A company with many investments in other companies will need to construct a

share pool for each company and each class of share.

Shares in the pool treated as a single source of shares, disposed of at their average

cost.

A proforma share pool is shown on the next page.

Purchasing shares to increase the pool

When the company purchases shares:

 the number of shares acquired is entered in the number of shares column, and

 the cost of the shares acquired is entered in both the cost and indexed cost

columns.

However, before recording any change in the pool cost, the indexation allowance

(IA) available up to that purchase date has to be calculated for the shares already in

the pool. This IA is added to the indexed cost column.

Selling shares from the pool

When the company sells some shares, the appropriate proportion of cost and

indexed cost is deducted from the appropriate columns in the pool.

However, before recording a sale, the IA available up to the date of the sale has to

be calculated and added to the indexed cost column.

Summary: the working for the share pool

The IA available on shares is calculated on a piecemeal basis, before recording each

operative event (for example, before recording a purchase of shares or a sale of

shares).

The IA is based on the indexed cost to date, and is calculated in the normal way for

gains on chargeable assets except that the indexation factor is not rounded to three

decimal places.

4.4 Proforma: share pool for companies

The share pool is constructed in chronological date order. The working for a share

pool should be presented as shown in the proforma below.

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Number

of shares

Original

cost

Indexed

cost

£ £

First operative event (a purchase that creates

the pool). Original cost = indexed cost.

X X X

Second operative event (for example, a

purchase)

(i) Indexation allowance:

From the previous operative event to

this operative event

Balance in the

Indexed cost

column

×

Indexation factor

(notes 1 & 2)

X

(ii) Purchase of shares X X X

––––––––––––––

–––––––––––––– ––––––––––––––

X X X

Third operative event (for example, a sale)

(i) Indexation allowance:

From the previous operative event to

this operative event

Balance in the

Indexed cost

column

×

Indexation factor

(notes 1 & 2)

X

––––––––––––––

X

(ii) Sale of shares (see note 3) (X) (X) (X)

––––––––––––––

–––––––––––––– ––––––––––––––

Pool balance carried forward X X X

––––––––––––––

–––––––––––––– ––––––––––––––

Notes

(1) The indexation factor is calculated as follows:

eventoperativelastofmonthforRPI

eventoperativelastofmonthforRPI—eventoperativethisofmonthforRPI

(2) Do not round the indexation factor to three decimal places.

(3) The appropriate proportion of cost and indexed cost to deduct from each

column when shares are sold is calculated as follows:

Total cost to date, or

Total indexed cost to date

×

Number of shares disposed of

Number of shares held (before the disposal)

Chapter 18: Chargeable gains of a company

Example

J plc purchased shares in K Ltd as follows:

Cost

£

16 May 1995 5,000 shares 34,500

27 September 2003 6,500 shares 37,700

On 13 March 2010, J plc sold 10,000 of the shares in K Ltd for £96,000.

Required

Construct the pool for shares in K Ltd to record these events.

Answer

Share Pool

Number

of shares

Original

cost

Indexed

cost

£ £

16 May 1995: Initial purchase

5,000 34,500

34,500

27 September 2003: subsequent purchase

(i) IA: from May 1995 to September 2003

£34,500

149.6

149.6 - 182.5

×

7,587

(Do not round this indexation factor)

(ii) Purchase of shares 6,500 37,700 37,700

–

–––––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––

11,500 72,200 79,787

13 March 2010: sale of shares

(i) IA: from September 2003 to March 2010

78779

5182

,£

.

5.1823.216

×

−

14,777

(Do not round the indexation factor)

–––––––––––––––––––––––––––––––

94,564

(ii) Sale of shares (see note below) (10,000) (62,783) (82,230)

–

–––––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––

Pool balance c/f 1,500 9,417 12,334

–

–––––

–

––––––––––––––––––––––––

–––––––––––––––––––––––––––––––

Note

Shares sold from the pool are removed at average cost. This applies to both the

original cost and the indexed cost column in the pool calculation.

Original cost: £72,200 × 10,000/11,500 = £62,783

Indexed cost: £94,564 ×10,000/11,500 = £82,230

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4.5 The chargeable gain on the disposal of shares from the pool

The gain on the disposal of pool shares is calculated as follows:

£

Gross sale proceeds X

Minus Incidental costs of sale (e.g. stockbrokers’ commission) (X)

Net sale proceeds X

Minus Allowable costs

i.e. The cost deducted from the cost column in the pool (X)

Unindexed gain/(loss)

X/(X)

Minus Indexation allowance (IA)

(indexed cost minus cost) see notes (1) and (2) below (X)

Chargeable gain/(allowable loss)

X/(X)

Notes

(1) These are the figures obtained from the working for the pool that are calculated

in relation to the sale.

(2) The IA must be shown separately because the IA deduction cannot create nor

increase an allowable loss.

(3) Rollover relief is not available on the disposal of shares.

Example

Using the data in the previous example for shares held by J plc, we would calculate

the chargeable gain arising on the disposal of shares as follows.

£

Gross sale proceeds

96,000

Minus Cost (from the working for the pool ) (62,783)

––––––––––––––––––––––––––––––––

Unindexed gain 33,217

Minus

IA (from the pool working) (£82,230 - £62,783) (19,447)

––––––––––––––––––––––––––––––––

Chargeable gain 13,770

––––––––––––––––––––––––––––––––

4.6 Bonus issues

The treatment of a bonus issue for tax purposes is as follows:

For identification purposes Treatment in the pool

Bonus shares are treated as if they

are acquired on the same day as the

original shares to which they relate.

 Bonus issues are not an operative event.

 Therefore do not calculate an IA before

recording a bonus issue.

 Simply add the number of shares into the

number of shares column.

 No entries are needed in the cost and

indexed cost columns.

Chapter 18: Chargeable gains of a company

Example

On 23 August 1999 L Ltd purchased 3,000 ordinary shares in M plc for £45,000. On 6

April 2002 M plc made a 1 for 6 bonus issue. On 31 December 2009 L Ltd disposed

of 2,000 of its shares in M plc for £40,000.

Required

Calculate the chargeable gain arising on the disposal of shares.

Answer

£

Gross sale proceeds

40,000

Minus Cost (from the pool working below) (25,714)

–––––––––––––––––––––––––––––––––

Unindexed gain 14,286

Minus

IA (from the pool, working shown below) (£33,437 - £25,714) (7,723)

–––––––––––––––––––––––––––––––––

Chargeable gain 6,563

–––––––––––––––––––––––––––––––––

Pool working

Number

of shares

Original

cost

Indexed

cost

£ £

23 August 1999: Initial purchase

3,000

45,000 45,000

6 April 2002 : Bonus issue

500 - -

–

–––––

–

–––––––––––––––––––––––

––––––––––––––––––––––––––––––

3,500 45,000 45,000

31 December 2009: Sale of shares

(i)

IA: from August 1999 to December 2009

£45,000

165.5

165.5-215.2

×

13,514

(Do not round the indexation factor)

–––––––––––––––––––––––––

–

––

–

58,514

(ii)

Sale of shares:

(2,000/3,500)

× £45,000

(2,000)

(25,714)

(2,000/3,500) × £58,514

(33,437)

–

–––––

–

–––––––––––––––––––––––

––––––––––––––––––––––––––––––

Pool balance c/f 1,500 19,286 25,077

–

–––––

–

–––––––––––––––––––––––

––––––––––––––––––––––––––––––

4.7 Rights issues

The treatment of a rights issue for tax purposes is as follows:

For identification purposes Treatment in the pool

Rights shares are treated as if they are

acquired on the same day as the

original shares to which they relate

(i.e. the same as the treatment of a

bonus issue).

 A rights issues is an operative event.

 An IA must therefore be calculated

before recording the rights issue.

 Treat the event in exactly the same

way as a normal purchase.

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Example

On 10 May 1996 N Ltd purchased 8,000 shares in O plc for £16,000. On 25 July 2001

O plc made a 1 for 4 rights issue at £5 per share. N Ltd decided to take up the offer

and purchased the shares to which it was entitled. On 31 December 2009 N Ltd

disposed of 4,000 of its shares in O plc for £55,000.

Required

Calculate the chargeable gain arising on the disposal of shares.

Answer

£

Gross sale proceeds

55,000

Minus Cost (from pool working, shown below) (10,400)

–––––––––––––––––––––––––––––––––

Unindexed gain 44,600

Minus

IA (from pool working, shown below) (£13,975 - £10,400) (3,575)

–––––––––––––––––––––––––––––––––

Chargeable gain 41,025

–––––––––––––––––––––––––––––––––

Pool working

Number

of shares

Original

Cost

Indexed

cost

£ £

10 May 1996: Initial purchase

8,000 16,000 16,000

25 July 2001: Purchase in rights issue

(i)

IA: from May 1996 to July 2001

£16,000

152.9

152.9-173.3

×

2,135

(Do not round the indexation factor)

(ii)

Rights issue (1 for 4) at £5 per share 2,000 10,000 10,000

–––––––––––––––––––––––––––––––

10,000 26,000 28,135

31 December 2009: Sale of shares

(i)

IA: from July 2001 to December 2009

13528

3173

,£

.

3.1732.215

×

−

6,802

(Do not round the indexation factor)

–––––––––––––––––––––––––––––––––––

34,937

(ii)

Sale of shares:

(4,000/10,000)

× £26,000

(4,000)

(10,400)

(4,000/10,000) × £34,937

(13,975)

–––––––––––––––––––––––––––––––

Pool balance c/f 6,000 15,600 20,962

–––––––––––––––––––––––––––––––

Chapter 18: Chargeable gains of a company

4.8 Takeovers

Where shares are held in a  company that is subsequently taken over by another

company, the treatment of this event for tax purposes depends on the consideration

receivedinexchangefortheoldshares.

Forexample,supposethatXLtdownssharesinYplc,andYplcistaken overbyZplc.

XLtdwillreceiveconsiderationfromZplcforthesaleofitssharesinYplctoZplc.If

thepurchaseconsiderationis100%cash,thechargeablegainiscalcul

atedinthenormal

way for a sale from the pool. However, the purchase consideration might not include

cash,ormightincludesomecashandsomesharesinZplc.



Insummary,theappropriatetreatmentisasfollows:

Consideration:

Does not include cash

Includes cash

For example, the consideration consists of shares

or other securities, but no cash.

For example, the consideration

consists of a mixture of shares

(and/or other securities) and

some cash.

This is not a chargeable disposal.

(It is a paper-for-paper exchange)

The new shares and securities received are

deemed to be:

 acquired on the same day as the original

shares

 for the same cost and indexed cost as the

original shares.

Therefore, at the time of the take-over, no

chargeable gain or allowable loss arises.

The original cost and the indexed cost of the old

shares are allocated to the new shares and

securities received in proportion to the market

values of the consideration received.

New pools for the new shares and securities are

set up (one pool for each class of shares or

securities received as consideration).

A chargeable gain may arise, but

only in respect of the cash

consideration received.

The amount of cash consideration

received is treated as the sale

proceeds.

The ‘cost’ of the cash is calculated

by applying the part disposal

formula to the cost (and indexed

cost) of the original shareholding.

Example

P plc owns 3,000 ordinary shares in Q Ltd, which it bought for £6,600 on 13 June

2000.

On 5 July 2009 Q Ltd accepted a takeover bid from R plc. The takeover offer

consisted of 1 ordinary share and 2 preference  shares in R plc for every 3 shares

heldinQLtd.

Atthedateofthetak

eover,themarketvaluesofRplcshareswereasfollows:

Ordinaryshares £20each

Preferencesshares £15each.

Paper F6 (UK): Taxation FA2009

Required

(a) Statethechargeablegainarisingatthetimeofthetakeover.

(b) CalculatethecostandindexedcosttobeenteredinthenewpoolsfortheRplc

shares.

Answer

(a) Thereisnochargeablegainatthetimeofthetakeoverasnocashconsideration

isreceived.

(b) TakeoverconsiderationreceivedbyPplc:



Market value

£

1,000 Ordinary shares in R plc 20,000

2,000 Preference shares in R plc

30,000

50,000



QLtd–Pool Noof

shares

Original

cost

Indexed

cost

£ £

13 June 2000

Purchase

3,000

6,600

5 July 2009

IA: from June 2000 to July 2009

£6,600

171.1

171.1-213.4

×

1,632

(Do not round the indexation factor)

––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––

Balance at time of takeover 3,000 6,600 8,232

––––––––––––––––––––––––––––––

–––––––––––––––––––––––––––––– ––––––––––––––––––––––––––––––

Allocation of the original cost and indexed cost

of the Q Ltd shares

Original

cost

Indexed

cost

£ £

1,000 Ordinary shares in R plc 20,000/50,000 × £6,600/£8,232

2,640 3,293

2,000 Preference shares in R plc 30,000/50,000 × £6,600/£8,232

3,960 4,939

––––––––––––––––––––––––––––

––––––

–

––––––––––––––––

6,600 8,232

–––––––––––––––––––––––––––

––––––

–

––––––––––––––––––



Twonewpoolsshouldbesetup,onefortheordinarysharesinRplcandoneforthe

preferencesharesinRplc,withanoriginalcostandindexedcostforeachpoolas

shownabove.

Paper F6 (UK)

Taxation FA2009

CHAPTER

19

Company trading losses

Contents

1 Introduction

2 The carry forward of trading losses

3 Relief for trading losses against total profits

4 Tax planning

Paper F6 (UK): Taxation FA2009

Introduction

 Calculation of trading losses

1 Introduction

1.1 Calculation of trading losses

A trading loss occurs when a company has:

 an adjusted trading loss before capital allowances which is increased by the

addition of capital allowances, or

 an adjusted trading profit before capital allowances which becomes a loss when

capital allowances are deducted.

If a trading loss occurs, the trading income assessment in the PCTCT statement for

the CAP:

 is £0 , and

 is not the amount of the loss.

This is shown in the table below:

£

Adjusted profit / (loss) before capital allowances X/(X)

Capital allowances on plant and machinery (X)

Industrial buildings allowances (X)

Trading loss (= negative figure) (X)

Trading income assessment in the PCTCT statement £Nil

Although the trading income assessment for the CAP is £Nil, the company is able to

obtain relief for the trading loss. As several options are available, the company

needs to consider the options and choose the one that gives it the optimum use of its

trading loss.

ACCA F6 FA09 Study Text 2010

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