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Selling shares bought at a discount

Need to understand CGT on listed shares acquired at a discount

Back in 2013 a partnership acquired various different investments in companies (all from one seller). Agreed values were set between the partners and the seller for 2 of the companies and then the total purchase price was split across the rest of the companies on what was a fairly notional basis. One of those companies was listed on the NASDAQ and 2000 shares changed hands. The value they allocated to the shares was $1000, but if they'd used the listed price then it would have been $30,000

They've just sold the shares for $40,000 and would obviously like to use the listed price at the time of acquisition as the base cost for the tax calcs. Our tax accountant is unsure what basis to use and has fired it back my way. Help please!

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07th Sep 2018 10:54

SarahL2011 wrote:

Our tax accountant is unsure what basis to use and has fired it back my way. Help please!

If your tax accountant doesn't know the rules for determining the base cost of assets for CGT purposes, then you need a new tax accountant.

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to Accountant A
07th Sep 2018 11:05

A bit unfair. The problem here is not a tax one. It’s one of establishing facts that were not fully considered when the shares were purchased. The purchasers need to go back and do what they should have done at the beginning. The tax adviser is quite right to throw it back at them.

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to johngroganjga
07th Sep 2018 15:34

johngroganjga wrote:

A bit unfair. The problem here is not a tax one. It’s one of establishing facts...

Indeed, but any competent tax adviser would ask the appropriate questions and explain what the law is on the matter.

The OP said "Our tax accountant is unsure what basis to use and has fired it back my way". If he/she "is unsure what basis to use" then that sounds like a tax question and they should do some research! How is the client going to have a better idea of what base cost is allowable for CGT purposes?

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07th Sep 2018 11:09

If you're asking "can we use a higher price than we actually paid?" the answer is no.

If you asking "how do we apportion the cost of this bundle of shares?" I doubt if any of us can help except in the most general of terms.

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07th Sep 2018 11:15

I agree our tax accountant isn't responsible for this - the partners should have got tax advice at the time they purchased these investments. But they didn't, and now those of us who are trying to do their accounts and tax returns are trying to pick up the pieces. I think there will be more confusion to come!

I'm not asking anyone to value the bundle of shares. I don't think that's how my question reads.

I'm trying to work out whether there is any basis for using the listed price as the base cost for the CGT calculation, or whether the notional $1k that the partners valued this shareholding at is what we will have to go with.

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to SarahL2011
07th Sep 2018 11:27

If you use the list price, that'll just move the cost around and leave less to allocate to the other holdings.

What you can't do is claim a cost you haven't paid.

So if you paid $4000 for the bundle and want to allocate $3000 to the holding you've just sold, you only have $1000 less to allocate to future sales.

It's not what they were worth, it's what you paid that matters.

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By Ruddles
07th Sep 2018 11:26

There’s a potentially important piece of information missing - were the Seller and Purchaser connected?

If not, I suspect that the base cost will be neither $1k nor $30k. It will be based on a properly considered apportionment of the price paid for the bundle of shareholdings.

Out of interest, are you sure you are asking the question in the right forum? I ask only because of “$”

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to Ruddles
07th Sep 2018 12:13

It was a US listed share - but the partnership is a UK registered one, so I think this is the right forum!

No connection between seller and purchaser. Seller wanted rid of a collection of investments built up over time and purchaser thought they could make some money out of them - and will do.

What do you mean by 'properly considered'? By whom? The partners did that consideration at the time (albeit 'properly' is up for debate).

I should say that while they bought all of these investments at the same time, they do hold the shares in each one separately.

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By Ruddles
to SarahL2011
07th Sep 2018 13:00

OK - just checking!

By 'properly' I mean something a little more scientific than a thoughtless notional split. The implication from above is that not all of the shares are/were listed, making it difficult perhaps to get a handle on market values - but that would be my first port of call, to apportion the consideration based on market values.

We don't have any idea of total numbers, but if they paid say $90k for a bundle of shares and only one holding was listed, with a list price of $30k at the time then, regardless of what notional figure was put on it for internal purposes, it's not an unreasonable assumption that of the $90k paid $30k relates to the listed shares. If on the other hand they paid only a total of $35k, with the unlisted shares representing a sizeable chunk of the holding, $30k may not be so reasonable. As noted above, without knowledge of ALL details we can only offer vague advice. The strict answer to your question is - "it depends".

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to Ruddles
07th Sep 2018 13:20

There was only 1 listed company amongst the whole lot. If I'm honest I don't think there was any logic as to why they didn't value it at its listed price. There were 2 of the larger investments that had some thought put behind them and then the rest was arbitrary - literally $10k against 1 and $20k against another etc.

They didn't discount it for any reason, it got lost amongst everything else that was acquired at the time. I'm thinking that we have a good basis for using its listed value as the base cost, although that would therefore mean something else would need reducing.

Good to have the discussion - thank you everyone - the fact that it isn't blatantly obvious which direction to take makes me feel better!!

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By jcace
07th Sep 2018 11:45

You (or the partners) might also need to consider WHY the shares were seemingly acquired at a discount. If the price paid was discounted because the remainder of the value was given in some other guise (eg release of debt etc), then you might need to take that into account too.

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09th Sep 2018 18:23

Was original acquisition at arms length?
If not market value supersedes the price paid. [TCGA s17]
Was NASDAQ quote market value for UK CGT? Not necessarily
A complication is the dates of the original acquisitions, as NASDAQ was only recognised as a stock exchange by HMRC a few years ago . Some research is required to see the NASDAQ value at the various dates the shares were acquired.
To add to the complications, it is not unusual for companies quoted on NASDAQ to issue restricted shares, insofar as the particular tranche is not yet admitted to quotation. HMRC will in such cases accept that NASDAQ price is not appropriate.
More research required here !

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