As you probably already know capital gain is the difference between the cost base of an asset and the price for which it is sold. What may not be so obvious is that the way in which capital gains are calculated can make a very big difference in how much tax you need to pay.
Before continuing the explanation it is important to introduce the concept of ?parcels?. A parcel of stocks is a group of stocks in a given company purchased on a specific date at a specific price. For example, a purchase of 1,500 XYZ stocks for £10.00 each on 22nd of February 2008 would be one parcel. The purchase of 1,250 XYZ stocks for £14.00 each on the 4th of March 2008 would be another parcel. These two parcels would then make up your total holding in XYZ: 2,750 stocks at a total cost of £32,500.00 making for an average cost base of £11.82.
The vast majority of investment portfolio management tools simply contain the last of the figures. They tell you that you own 2,750 XYZ stocks with an average cost base of £11.82. Unfortunately, lumping parcels together in this manner can lead you to paying too much tax when the shares are sold.
For example, if you were selling 1,000 XYZ stocks for £13.00 each then systems which lump the parcels together will simply record an income of (£13.00 x 1,000 = ) £13,000.00, with a capital gain of ((£13.00 -
£11.82) x 1,000 = ) £1,181.82. You would then need to pay tax on £1,181.82.However, in most countries you can choose which of the parcels you wish to sell. Tracking parcels separately enables you to make that choice.
One choice could be to allocate all of these units as sold from the second parcel which would also result in an income of £13,000.00 and a capital loss of ((£13.00 ? £14.00) x 1,000 = ) - £1,000.00. In thi s case there is no tax to pay and the loss may be used to decrease tax liability.
Same sale, same income, very different after-tax results! Obviously there are some other factors at play. The amount of time for which you have held the various parcels can make the difference even more pronounced. However, the main point is this: you either have control over the tax consequences of a sale or you do not.
Why the disregard for this important issue? Do the portfolio management products / spreadsheets used by readers of this group afford users the proper choice when selling shares?
The software that claims to be "The UK's most popular investment software" lumps everything together... There are a couple of Australian products, Manage Invest (capable of managing UK portfolios and includes UK tax module) and MySF Manager (not suitable for use in the UK) that split parcels and allow the choice as detailed above. Are there any others out there that have this capability?