Movement Codes

Rule A1

Rule A1 is used for normal acquisitions where the cost is incurred on the transaction date. Indexation is given from the transaction date, unless overridden by a CGT Override date.

Rule A2

Rule A2 is used for entering bonus issues, etc. where there is a quantity but not a value. The application requires a ratio in conjunction with the quantity. The quantity is rounded down to the nearest whole number where the Security’s Unit of Quotation is ‘Shares’, as opposed to ‘Fixed Interest’ or ‘Units’. The quantity is allocated to the earliest acquisitions first, which can leave a small rounding difference on the latest acquisition quantity:

Acquisition example

A bonus issue of 1 for 3, i.e. 825 shares for the 2,475 shares held, is allocated as follows.

For acquisitions between 6/4/65 and 5/4/98, the CGT Report simplifies the presentation by allocating back to the 82 pool (6/4/65 to 5/4/82) or the 85 pool (6/4/82 to 5/4/98) rather than back to the individual entries.

The ratio entered on an A2 entry is purely for documentation. The entry stores the quantity received and, if an earlier dated purchase or sale is subsequently made, then the quantity received is not recalculated from the ratio. In this case, it is necessary to edit the subsequent bonus issues.

Rule A3

Rule A3 is used for entering rights issues, where the cost is paid in one instalment. The allocation is done in a similar way as for bonus issues, but is an allocation of quantity and cost.

Rule A4

Rule A4 is used for cost write-downs where cash is received but there is no change in the holding, for example for a sale of rights where the proceeds are less than 5% of the value of the holding. The application allocates the cost back to the relevant acquisitions in a similar manner as for rights/bonus issues.

If an A4 entry is being used for a cost write-up, then it is positive. An A4 entry used for a cost write-down should be negative. However, if the client has a nominal ledger, then set the Negative Addition attribute on the cost write-down movement code to allow positive amounts to be entered for write-downs as well as for write-ups.

The quantity on A4 (and D3) entries does not affect the holding. The quantity on other capital rule codes does affect it.

Rules A5 and A6

These rules are used where new issues of shares are payable in instalments. Rule A5 relates to the first instalment and A6 to subsequent instalments. On entering a transaction with the rule A6, no quantity is required. An A6 type transaction can only be used in conjunction with an A5 type. The effect is that if the period between the first call (A5) and subsequent calls (A6) is not greater than 12 months, on a subsequent disposal indexation is given with reference to the date of the first call. If the period exceeds 12 months, indexation is given with reference to the date(s) of the relevant calls.

A5 and A6 transactions, which are entered before 1982 must have 1982 values specified. Otherwise, the A5 entry takes the whole 1982 value from the Security record. The same applies to pre-1965 entries. A simpler approach is usually to sum the total acquisition cost.

Rule A7

Rule A7 was originally used between 1982 and 1985 when indexation was only available from 12 months after the acquisition. The A7 rule allowed immediate indexation for certain inter-spousal transfers. This explains its title, ‘Index from Transaction Date’. However, it is now used for cost write-ups (and downs) where it is not feasible to identify the original acquisition being adjusted from the transaction date. Until recently it was only used for rare transactions such as significant charges, which are paid after the original transaction date, for example, a broker’s bill presented late. The CGT Override Date is used to identify the main transaction. However, the indexation starts from the transaction date. (On other rule codes the indexation starts from the CGT Override Date, if present.)

However, with the end of indexation on 5/4/98 it has acquired a new lease of life for taking on pool balances. This is described under Indexation Accrued below.

Rule A8

This rule is used for inter-spousal transfers, in particular for the acquisition of shares by the transferee. The A8 rule code is used for transfers post-5/4/1998 where the original acquisition was post-31/03/1982.

If the transferor originally made multiple acquisitions, these acquisitions can be written up on the transferee using entries with an A8 rule. The transaction date is the transfer date; the CGT Override date is the original acquisition date. The application performs matching using the transaction date. If there were several original acquisitions then they all have the same transaction date. In this case, they are treated as a single acquisition and ‘section 42 apportionment’ is performed. However, for taper relief purposes the CGT Override date is used. If there were several original acquisitions then taper relief is calculated looking at each transaction’s original acquisition date using LIFO for post-5/4/98 entries.

No indexation is calculated on an A8 entry and, because the taper relief is based on the CGT Override Date, this rule code is described as ‘A8 No indexation, override taper date’ in editing movement codes. The use of the A8 rule is described in more detail under Inter-spousal Transfers.

Rule D1

Rule D1 is used for normal disposals at arms-length, where the proceeds are received on a single date, for example, sales, disposals and redemption.

Rule D2

Rule D2 is used for disposals, which are exempt from CGT, no matter what proceeds are entered. It is used for conversions of securities, paper for paper takeovers, transfer to spouse, etc.

Rule D3

Rule D3 is used for ‘partial disposals’, i.e. where cash is received, the holding is unchanged, and a profit or loss arises. The main example is for sales of rights greater than 5% of the market value. However, it also applies to the cash element of a takeover and other reorganisations. On entering a D3 transaction, the application requests the market value of the remaining holding. It automatically calculates the matched cost of sales using the formula, (AxB)/(B+C) where

If a client has no nominal ledger then no quantity is requested in Data Entry.

If a client has a nominal ledger then a quantity is requested but it does not affect the holding. Instead, it is used to calculate the proportion of the holding on which the partial disposal occurred, the ‘base holding’. Normally this is the same as the current holding. However, if it is different, it is important that the market value entered is the market value of the base holding, not the market value of the entire holding. As with the A2 and A3 rules, if backdated purchases and sales are made after a D3 entry has been made, then the D3 entry needs to be edited to update the new base holding.

Rule D4

Rule D4 is no longer used.

Rule D5

Rule D5 is used for a general sale of rights. As for a D3 rule, the application requests the market value during Data Entry. However, it automatically calculates whether the proceeds exceed 5% of the market value. If so, the application stores a D3 rule code in the entry; if not, it stores an A4 rule. Note that no entry in the application ever has a CGT Rule of D5; it is always A4 or D3. Note also that if the entry is amended the CGT Rule is not amended automatically. So, the entry may need to be deleted and re-entered.

Rule D5 is a new feature and ex-Trust Accounts users may prefer not to use it. Traditionally, they have determined the rule code manually. This is because there have been some court cases where the ‘small value rule’ was not interpreted as simply being 5%. These users may prefer to continue as before with two separate movement codes, one set as rule A4 and the other as D3.

For the moment, D5 rule codes cannot be used on an investment ledger only client, nor are they used by the Autopost. However, the Transaction Import does recognise a D5 rule.

Rule D6

Rule D6 is used for transferring out part of the cost of a holding. This could be because a demerger has taken place and a proportion of the cost needs to be transferred to a different security. Similarly it may be because a proportion of a holding has been transferred to a beneficiary of a trust. In general, it is similar to an exempt D3 rule.

When a D6 entry is entered the following fields must be completed:

A D6 does not have a quantity field, a CGT Override Date or Amount. For accounting purposes the cost transferred out is the Transaction Amount. This is shown on the Investment Schedule or in the nominal ledger. For CGT purposes, the cost of the holding is reduced by MV transferred/(MV transferred + MV remaining).

When the CGT cost is reduced, it is as though the cost had never been there. This is different from the effect of a negative A4 entry. A negative A4 entry reduces the cost of all previous unmatched acquisitions. However, it affects the indexation only from the date of the A4 entry. This treatment is correct for a sale of rights less than 5%, i.e. for negative ‘enhancement expenditure’. However, it is not correct for the cost write-down in a demerger. A D6 entry reduces both the cost and the associated indexation from all previous unmatched acquisitions.

Rule V1

Rule V1 is used for entering dividends. If dividends have already been posted and are subsequently reclaimed by the market, you may re-enter the dividend and the tax credit as negative values.

Rule V2

Rule V2 is similar to rule V1 but is intended for interest.

Rules V3 and V4

These rules are not normally used. However, they can be used to record an accrual for a future dividend (V3) or interest payment (V4). Typically one would enter an amount (positive or negative) on the last day of the financial year and immediately reverse it on the first day of the next year. This is normally only done for charity accounts. For other accounts either no accrual at all is calculated, or an overall accrual is calculated for the whole portfolio and then entered through the nominal ledger as a journal.

Rules V5 and V6

These rules are for entering amounts under the Accrued Income scheme. V5 is for posting charges (income); V6 is for allowances. V6 entries should be entered as negative. These entries can be selected for inclusion on the Income and Acquisition schedule.

Note that both rule codes only apply to investment ledger only clients. If a nominal ledger is in use then the accrued income is handled as part of the relevant purchase or sale. This has the advantage that if the sale or purchase is deleted then the accrued income is deleted at the same time. Also, if an accrued income account has been specified on the investment account, the nominal posting for the purchase or sale shows the entire posting including the accrued income.

Rules V7 and V8

These rules are used for foreign income dividends and stock dividends respectively. At the time of writing, the tax on these dividends is referred to as notional tax rather than a tax credit and cannot be reclaimed by a non-taxpayer.

Rules V9 and VA

These rarely-used rules are for dividends and interest paid gross.

Disposals

Most disposals (‘D’ rule movement codes other than D3s and D5s), can be set up as a Normal Disposal accounting rule which gives rise to a profit or an Adjustment to Cost which does not. For example, Trust Accounts used to treat a Gift Out as a normal disposal; whereas CCH Trust Tax used to treat it as a cost adjustment. So, an ex-Trust Accounts user might want to set up a Gift Out as a Normal Disposal while an ex-CCH Trust Tax user might prefer to set it up as an Adjustment to Cost.

Acquisitions

The options available on a purchase are Normal Purchase and Adjustment to Cost. Normally these amount to the same thing. However, if a holding is negative, i.e. an investor has ‘gone short’, then a Normal Purchase strikes a profit when the investment is bought, whereas an Adjustment to Cost does not.

Sale of Rights Accounting Rules

A Sale of Rights (which can be an A4, D3 or D5 rule) should be set up as Ask SoR Treatment. For a client with a nominal ledger, this means that the accounting treatment is requested at the time of Data Entry. It can be a Partial Disposal, a Reduction of cost or Take cash as profit. This Accounting Treatment can be subsequently edited on the CGT Details window. Note that the Accounting Treatment is only requested in Data Entry for a client with a nominal ledger. Data Entry in an investment ledger only client automatically takes the Accounting Treatment from the CGT rule, i.e. Adjustment to Cost for an A4 and Partial Disposal for a D3. The same applies to other methods of making entries, Autopost or Transaction Import.

Partial Disposal Accounting Rule

This option is used for partial disposals other than sales of rights, for example, a partial disposal that occurs from the cash element of a demerger. Unlike the Sale of Rights Partial Disposal, the accounting treatment cannot be edited afterwards. Another difference is that the application does not request the First Day Price for these partial disposals, as the relevant market value is the market value of the new holding(s). As several holdings are involved, this cannot be calculated just by multiplying the First Day Price by the current holding.

Takeover - Paper element Accounting Rule

The paper element of a takeover does not give rise to a CGT gain. After any cash element has been posted, the old shares have a cost write-down to reduce their value to zero (rule code D2), and the new shares are acquired by a purchase or a cost write-up (rule A1). The Takeover - Paper element rule is applied to the cost write-down part of the transaction. It acts like a normal cost write-down, except that the units and the amount both default automatically to the current holding and cost respectively.

Nil Quantity

This attribute allows, but does not require, an entry to have a zero quantity. The quantity, if present, updates the holding for all A and D rule codes apart from A4 and D3.

Negative Addition

This is used on A rule codes, where the purpose of the rule code is to reduce the cost, for example on an A4 rule, which is being used as a cost write-down. It allows a positive amount to be entered, which is treated as a negative cost movement. Currently, it only has effect on a client with a nominal ledger.

Heldover Gain

This attribute enables a Heldover or Deferred Gain to be recorded on an entry. Heldover gains relate to additions of shares and unit trust units. Deferred gains relate to additions of fixed interest securities.

Heldover Gains:

Heldover gains can arise when an asset is transferred. Instead of the transferor paying CGT, the gain is calculated and heldover so that it becomes payable when the transferee sells the asset. When this final disposal occurs, the heldover gain is subtracted from the cost before the chargeable gain is calculated. So, the heldover gain cannot exceed the cost of the asset being sold.

Deferred Gains:

Deferred gains arise when a complex capital event gives rise to a qualifying corporate bond (QCB). The QCB itself is exempt from CGT. The gain on the parent security to date is calculated. A proportion of this gain is transferred to the QCB. However, the CGT on the gain that is transferred is deferred until the QCB is sold.

Although a deferred gain can be entered manually on an addition of a fixed interest security, in practice they are usually entered automatically by running the CCT Wizard.

The deferred gain is the untapered gain. The taper relief available depends on the time the parent security was held, not on the time the QCB was held. So, in addition to recording the deferred gain the application also requests the ‘Taper Percentage’. This is the percentage of the gain that is chargeable to CGT when the QCB is sold.

The parent security could be a normal asset, a business asset or an asset of mixed use. The deferred gain and taper percentage are therefore recorded for both personal and business use.

CGT Override

This is used on A rule codes to allow a CGT Override Date and a CGT Override Value to be entered on an entry. This is of use when the date and amount for CGT purposes differ from the date and amount for accounting purposes. This happens most often for a transfer between spouses, which can be entered as follows:

Connected Person

When:

§  there is a transfer between connected persons (typically spouses)

§  who both have holdings in the same security, and

§  this transfer includes bonus or rights issues

then a special movement code must be used with the Connected Person attribute set to ensure that the bonus continues to be attached to the same original acquisition.

Care must be taken to correctly code the date fields of the transaction:

Indexation Accrued

This can be used to take on opening balances when a full investment history for a security is not available and all the transactions are known to belong to the same pool. It allows the field Indexation on Acquisition to be used on an entry. The method is to enter:

If the client has a nominal ledger or if the accounting profit is required on the Investment Schedule, then the Transaction value needs to be the accounting cost, i.e. based on the average cost, and the indexed cost goes in the CGT Override value field.

With the end of indexation for personal disposals on 5/4/1998 the most important use of Indexation Accrued is for taking on the 1985 pool value at 5/4/1998. The problem is that if the 1985 pool came into existence before 17/3/1998, an extra year’s taper relief is allowed. If we enter a transaction dated 5/4/98, we would not get the extra year’s taper relief. On the other hand, if we dated the transaction 16/3/1998 then the application calculates one last month’s indexation on a subsequent disposal.

A solution to this problem is to use a movement code with an A7 rule:

The indexation on an A7 rule is calculated from the transaction date, which is 5/4/1998. So, no further indexation is calculated, whereas the taper relief is based on the CGT override date, which is 16/03/1998 allowing the extra year’s taper relief. The 1982 pool value can also be taken on in this way, i.e. by using an Indexation Accrued and an A7 rule; by dating the transaction at 5/4/98 or later; and by setting the CGT override date to 5/4/1982 to get the extra year’s taper relief.

Indexation Accrued can also be used to record the value of accrued indexation included in the figure of cost in an inter-spousal transfer taking place before 29/11/93. This is so that the CGT application can correctly deal with indexation on a post 28/11/93 disposal.