ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice. Change 29: Share loss relief: identification of shares disposed of out of a mixed holding: section 148
This change expands and clarifies the rules for identifying the shares disposed of, in cases where an individual disposes of some only of the shares in a mixed holding. As to what constitutes a mixed holding, see Change 27.
Section 576(1) of ICTA sets out a general rule that, where shares are disposed of by an individual out of a mixed holding, the shares disposed of are to be identified on a last in first out (LIFO) basis.
This rule is modified by section 576(1A) and (1B) of ICTA in the case of a mixed holding which includes shares to which EIS income tax relief, EIS deferral relief or BES relief is attributable.
At the time of the introduction of this provision by section 37 of FA 1980 and of its consolidation in 1988 as section 576(1) of ICTA, share pooling applied generally for the purposes of capital gains tax. Under share pooling, shares of the same class acquired by the same person in the same capacity are regarded as indistinguishable parts of a single asset. Thus, the consideration given for the shares in the pool is spread evenly across the shares and there is no need for capital gains tax purposes to identify the specific shares disposed of.
The LIFO identification rule is, therefore, necessary for the purposes of section 574(1) of ICTA to identify whether, on the disposal of some only of the shares out of a pool consisting partly of shares that are not capable of being qualifying shares, the shares disposed of are qualifying shares.
Share pooling continues for capital gains tax purposes in relation to shares acquired before 6 April 1998 (see sections 104 and 109 of TCGA), but from that date sections 105(2) and 106A of TCGA substitute rules for identifying shares disposed of as between shares acquired on different dates falling on or after 6 April 1998 and as between shares acquired on or after that date and shares acquired before that date.
In practice the rule in section 106A(6) of TCGA applies in the majority of cases. This provides that shares disposed of are to be identified with shares acquired at a later time, rather than with shares acquired at an earlier time. Shares acquired before 6 April 1998 remain pooled.
This is a LIFO rule and so, as regards shares acquired on or after 6 April 1998, does not differ from the rule in section 576(1) of ICTA.
Where all the shares have been acquired on or after 6 April 1998 by single acquisitions on different days, the capital gains tax rules in section 106A of TCGA serve, in practice, to identify the shares disposed of without need for recourse to the rules in section 576(1) of ICTA.
Section 105 of TCGA also contains rules in relation to shares acquired on the same day. Those rules are modified by section 105A of TCGA in relation to certain shares acquired on or after 6 April 2002. Section 105A is supplemented by section 105B of TCGA. In general, shares of the same class acquired by an individual on the same day are pooled.
In practice, if some but not all of the shares of the same class acquired on the same day are shares that are not capable of being qualifying shares and if some only of the shares acquired on that day are disposed of, the question whether and to what extent the shares disposed of are qualifying shares is determined for the purposes of section 574 of ICTA on a just and reasonable basis; normally pro rata to the number of shares acquired on that day.
In rewriting the rule in section 576(1) of ICTA, the approach taken in section 148 of this Act is that:
	so far as the rules in sections 105 to 105B and 106A of TCGA serve conclusively to identify whether and to what extent the shares disposed of out of a mixed holding are qualifying shares, those rules are explicitly applied (see subsections (3)(a)(i) and (4));
	so far as shares acquired on different days are treated as a single asset for capital gains tax purposes under section 104 of TCGA (a “section 104 holding”), the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the section 104 holding (see subsections (3)(a)(ii) and (5)); and
	so far as shares acquired on different days are treated as a single asset for capital gains tax purposes under section 109 of TCGA (a “1982 holding”), the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the 1982 holding (see subsections (3)(a)(ii) and (5)).
In a case where the mixed holding includes shares to which EIS income tax relief, EIS deferral relief or BES relief is attributable, subsections (3)(a), (4) and (5) are displaced by subsections (3)(b) and (6). Subject to the change described in Change 30, the rules applied by those subsections are the same as those applied by section 576(1A) and (1B) of ICTA.
So far as the preceding rules do not conclusively determine whether and to what extent the shares disposed of are qualifying shares, for example where some but not all of the shares of the same class acquired on the same day are shares that are not capable of being qualifying shares, subsection (7) states explicitly that the determination is to be made on a just and reasonable basis.