Taxation of Direct Investments

• Topic 01

  Taxation of Direct Investments

  28 questions

A few questions from this unit, with the answer and a full explanation. The complete bank is available when you start practising.

1. How does a rights issue affect the Section 104 pool for CGT purposes?

   • A
     The subscription price of the new shares is added to the pool cost, and the number of new shares is added to the pool quantity
     Correct answer
   • B
     The rights issue shares are added at nil cost, like bonus shares, because they arise from the existing holding
   • C
     The pool cost is increased by the market value of the new shares on the date they are taken up
   • D
     The rights issue creates a chargeable event; CGT is payable on the 'discount' between market value and subscription price
   Explanation

   When a shareholder takes up a rights issue, the new shares are paid for at the subscription price. Under TCGA 1992, S104, the subscription cost is added to the Section 104 pool cost, and the number of new shares is added to the pool quantity. This increases the pool size and adjusts the average cost per share. This differs from a bonus (scrip) issue, where no payment is made and the new shares are added at nil cost, reducing the average cost per share.

2. An investor sells 1,000 shares outside an ISA to crystallise a gain within the Annual Exempt Amount and immediately repurchases 1,000 shares of the same company inside their ISA. What are the CGT and matching rule implications?

   • A
     The 30-day rule applies and the repurchase inside the ISA is matched against the disposal, eliminating the gain
   • B
     The disposal in the general account crystallises the gain using the S104 pool cost; the 30-day rule does not apply to the ISA repurchase, so the gain is recognised and the AEA can be used
     Correct answer
   • C
     The disposal creates a loss rather than a gain because the repurchase inside the ISA is at a lower effective cost
   • D
     The disposal and repurchase are matched because the shares are economically equivalent regardless of the ISA wrapper
   Explanation

   Bed-and-ISA is an effective tax planning strategy precisely because the 30-day rule does not apply to ISA repurchases. The investor sells shares in the general account, crystallising a gain (or loss) against the S104 pool cost. The Annual Exempt Amount (£3,000) can absorb small gains. The shares are then repurchased inside the ISA — since the ISA-held shares are in the beneficial ownership of the ISA manager (not the investor directly), they are not the same beneficial ownership as the sold shares. Future income and gains on the ISA-held shares are tax-free.

3. A higher-rate taxpayer holds 10,000 shares in a company and receives a dividend of 30p per share in 2025/26. Calculate the income tax on the dividends.

   • A
     £1,012.50 — full £3,000 (ignoring Dividend Allowance) at 33.75%
   • B
     £0 — dividends are exempt for shareholders in UK companies
   • C
     £262.50 — all £3,000 at 8.75% basic-rate dividend rate
   • D
     Total dividends = £3,000. Dividend Allowance: £500 at 0%. Remaining £2,500 at 33.75% = £843.75. Total dividend tax = £843.75
     Correct answer
   Explanation

   Total dividends = 10,000 × £0.30 = £3,000. As a higher-rate taxpayer, dividend rates apply: £500 Dividend Allowance at 0%; remaining £2,500 (£3,000 minus £500) at 33.75% = £843.75. Total income tax on dividends = £843.75.