1 November 1996

CGTrisk hangs over sales of Crest shares…

By David Higham

THE 30% rise in the value of Dairy Crest shares since flotation provides a useful paper profit, but may lead to capital gains tax liabilities. Careful planning is therefore essential.

Most dairy farmers have received shares from both the "eligible producer" offer (which are deemed to have cost nothing), and the "rolling fund" offer (where the book cost is the issue price of 155p).

So if 10,000 shares were received via the eligible producer offer and 5000 through the rolling fund offer, the total book cost would be £7750 (5000 x 155p).

With a share price now close to 200p, the value of the 15,000 shares would be £30,000.

For the current tax year, each individual is allowed to make a capital gain of £6300 without being subject to CGT. So upon sale of the shares, the tax bill would be £6380 (table 1).

The simplest method of avoiding paying CGT is to only sell enough shares to utilise the allowance. At current market rates this would equate to just over 4000 shares (table 2).

By timing sales to straddle the tax year (ie selling on Apr 5 and Apr 6), double the amount of shares could be sold at little market risk.

It should also be remembered that married couples each have a CGT allowance and can transfer assets between themselves without incurring inheritance tax. By marketing the shares in joint names, both allowances can be used.

Of course, many farmers will want to remain long-term holders of the shares. But here again, careful planning can help avoid paying unnecessary tax at a later date should the shares eventually change hands.

By carrying out a "bed and breakfast" transaction it is possible to make use of the CGT allowance and still retain the shareholding.

This involves selling the shares to realise a capital gain and re-purchasing them the following day to establish a new book cost.

The example given shows how 4256 shares could be sold within the CGT allowance.

By doing a bed and breakfast transaction, the new book cost of the holding is the cost of the "new" shares (4256 x 200p) plus the cost of the remaining "old" shares (10,744 x 52p). This is £14,099 or 94p per share.

Suppose Dairy Crest were to be taken over for 200p cash per share. This leaves a liability of £3840, a saving of £2540 compared to the original scenario (Table 3).

For long-term holders of Dairy Crest shares, arguably the most tax-efficient method is to transfer the shares into a personal equity plan (PEP).

The procedure is similar to a bed and breakfast, as the shares cannot be transferred directly into the PEP: They are sold to realise the gain and then repurchased through a PEP.

Once within the PEP, the shares are free of any further CGT liability and the dividends free of income tax.

&#8226 David Higham is a fund manager with stockbrokers Quilter &Co.

Although there are costs – and time – involved in completing the paperwork, the above examples demonstrate that, with foresight and planning, significant tax savings can and should be made.

Table 1

£

Capital gain22,250

Less allowance6,300

Taxable gain15,950

Bill at 40% tax rate6,380


Table 1

£

Capital gain22,250

Less allowance6,300

Taxable gain15,950

Bill at 40% tax rate6,380


Table 3

£

Gain per share

£2 – £0.941.06

Total gain

15,000 x £1.0615,900

Taxable gain

£15,900 – £6,3009,600

Bill at 40% tax rate3,840


Table 2

£

Cost per share

£7,750/15,0000.52

Gain per share

£2 – £0.581.48

Shares to be sold

£6,300/£1.484,256