Tax and your investments

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9. Base cost

The base cost of shares is one half of the equation in calculating your capital gains tax liability, the other being the disposal proceeds.

At the simplest level, base cost is the amount which you paid for the shares, including broker commissions and stamp duty.

» Example

You buy 1,000 shares in Multimower plc for £2.00 each. The charges listed on the broker's contract note will be:

• Cost of the shares - £2,000
• Stamp Duty (0.5%) - £10
• Broker's commission (1.65%) - £33
• Broker's compliance levy - £5

The base cost to you of the shares is therefore £2,048.

But the base cost can be complicated in a number of ways, the most common of which are:

1. Inflation-adjusting devices

   Shares which you buy for £1 and sell for £2 ten years later have not truly increased your wealth by 100% because the buying power of £1 has decreased over the 10 years. HMRC recognised that gains on shares held for a long period are not what they appear to be. "Indexation" was designed to account for this, but has been replaced by "taper relief" with effect from 6th April 1998. In certain circumstances you could take advantage of both indexation and taper relief together to reduce your CGT liability. However, from April 2008 this no longer applies.

2. Corporate actions

   When a company "splits" its shares, or has a rights issue, or is taken over by another company, the result is that you end up with more or different shares than you actually acquired for cash. It can be difficult to establish your base cost. Special rules exist to cover these situations.

Note: If you have inherited shares or property then the base cost is the probate value - that is the market value of the asset at the date of death of the donor. Death is the only event that circumvents capital gains!

1. Keeping it legal 2. How HMRC treats your investment income 3. Keeping records 4. The basis of dividend income 5. Dividend income 6. Interest income 7. Interest on Treasury Stock 8. Capital gains tax basics 9. Base cost 10. Indexation 11. Taper relief 12. Indexation and taper relief - together! 13. Date of acquisition 14. Disposal proceeds 15. Disposal of a holding with a history 16. Takeovers 17. Bonus/scrip issues 18. Share splits 19. Buybacks 20. Rights issues 21. Share options 22. Beneficiaries and minors 23. Calculating your CGT liability 24. Using your annual CGT exemption 25. Transfers between spouses 26. ISAs 27. Delaying capital gains 28. Other tips to reduce CGT liability 29. Conclusion