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TonyTax
TonyTax, Tax Consultant
Category: Tax
Satisfied Customers: 15950
Experience:  Inc Tax, CGT, Corp Tax, IHT, VAT.
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I need your help in working out income tax and capital gains

Customer Question

I need your help in working out income tax and capital gains on the Vodaphone return of capital earlier this year.
Submitted: 2 years ago.
Category: Tax
Expert:  TonyTax replied 2 years ago.
.

Can you tell me what you started with, ie the Vodfone holding and its cost before the Verizon demerger, what ended up with in terms of Vodadfone and Verizon shares, whether you elected or C shares and what cash payments you received please.
Customer: replied 2 years ago.

I had 44622 Vod shares to start and they were inherited in 1991. I asked and got £13,187 and now have 24339 shares left. I was given 1173 Verizon shares and these were sold and a sum of £32955 was returned to me. What are the implications tax wise? sorry while to answer

Expert:  TonyTax replied 2 years ago.

Thanks.

Do you have any idea what the Vodafone shares were worth in 1991 when you inherited them? When exactly in 1991 did you inherit the shares? Were they Racal shares or Vodafone shares? Vodafone demerged from Racal in September 1991. Did you inherit 44,622 shares or a smaller number which increased over time? If it was a smaller number, do you remember how many it was?

Customer: replied 2 years ago.

It was a smaller number increasing over time. An accountant worked out that the base cost was 44p

Expert:  TonyTax replied 2 years ago.
Thanks.

I'll use 44p as the base cost of the Vodafone shares you held before the Verizon demerger. The calculations will take a while so leave this with me and I will post my answer as soon as I have finished.
Customer: replied 2 years ago.

Can one consider any tapering relief etc in the calculations in these or has that ended? thank you

Expert:  TonyTax replied 2 years ago.
Taper relief was withdrawn with effect from 6 April 2008 I'm afraid. As a prid pro quo, the CGT rate was reduced to 18% from a possible top rate of 40%, though there are now two rates, 18% and 28%. I will get back to you with my answer.
Expert:  TonyTax replied 2 years ago.

again.

There is some detailed information here and here on the tax implications of the Vodafone/Verizon demerger. As you election cash dividend, you took the C option.

The adjusted cost of the Vodafone holding of 44,622 shares was £19,634 (44p per share). The new Vodafone holding was worth £58,998 and the new Verizon holding was worth £33,161 after the demerger. The combined value of the new holdings was, therefore, £92,159. The cash received from Vodafone was £13,187 but it is a dividend so has no part in the cost apportionment. The cost of £52,795 (£19,634 + £33,161) is apportioned as follows:

24,339 VODAFONE SHARES

(£58,998 / £92,159) x £52,795 = £33,798

1,173 VERIZON SHARES

(£33,161 / £92,159) x £52,795 = £18,997. Any cash paid to your of Verizon shares should be deducted from the figure of £18,997 to arrive at the true net cost of the Verizon shares. Assuming no fractional cash was received, you made a gain of £13,958 when you sold the Verizon shares (£32,955 - £18,997).

The £13,187 return of value payment and the value of the Verizon shares of £33,161 are treated as dividends tax purposes with a 10% notional tax credit attached so the gross is £51,498 (£13,187 + £33,161 / 0.9). You will almost certainly have higher rate tax to pay on some or all of the dividend depending on how much other income you received in 2013/14.

I hope this helps but let me know if you have any further questions.

Customer: replied 2 years ago.

Thank you detailed reply. I replied to your query but am not sure if it was sent properly. Does this mean I pay income tax on the two dividends but not CGT?

Expert:  TonyTax replied 2 years ago.
The dividends are subject to income tax, not CGT. However, they carry a 10% tax credit so if any part of the dividends go into the higher tax band, you will have some extra tax to pay. Take a look here on dividends and tax.

You made a gain on the sale of the Verizon shares of £13,958.
Customer: replied 2 years ago.

I wanted to have some time to think this over. May I come back to you tomorrow?

Expert:  TonyTax replied 2 years ago.

You certainly can though I will probably be unavailable from midday tomorrow until the early evening.

TonyTax and other Tax Specialists are ready to help you
Customer: replied 2 years ago.
I have a question . Is he available.
Expert:  TonyTax replied 2 years ago.
I am here.
Customer: replied 2 years ago.
You helped with a query on the Vodaphone/Verizon return of value. You said the income option was treated as two dividends and worked out an equation. It was based on the net vodaphone dividend. Should it have been on the gross dividend?
Also do I need to pay CGT on the gain on the sale of the Verizon shares?
Expert:  TonyTax replied 2 years ago.
Leave this with me while I re-acquaint myself with the original question and answer.
Expert:  TonyTax replied 2 years ago.
again.

The cost is based on the cash dividend, not the cash dividend plus the tax credit.

Take a look at page 3 here. In the example under Income Tax , the value of the 2 Verizon shares is £57.67 and that is treated as a net dividend. Lower down under Capital Gains Tax, the £57.67 is added to the original base cost of the Vodafone shares to arrive at the cost to be apportioned between the Vodafone shares and the Verizon shares.

Any gain you make on the sale of the Verizon shares is a gain that could be subject to CGT depending on your situation /14 as far as overall gains is concerned.
Customer: replied 2 years ago.
If the Vodaphone dividend was net and the Verizon gross how do I present them on the SA form? Normally, you would just add them together wouldn't you but I can't if one is net and one gross?
Expert:  TonyTax replied 2 years ago.
See the first paragraph at the top of page 3 here.

You get a 10% tax credit on each dividend. Under new rules introduced in the UK a few years ago, dividends paid by a country with which the UK has a double tax treaty, the US in this case,, are deemed to carry a 10% tax credit. Take a look at HS263 information.

You should show the Verizon dividend in the foreign pages SA106.

I've done many of these calculations since the Vodafone/Verizon demerger and I don't really need to refer to the notes any longer.
Customer: replied 2 years ago.
The Verizon shares were sold as soon as they were acquired so I have never received a dividend from them.
Expert:  TonyTax replied 2 years ago.
Again, I refer you to the first paragraph, The Return of Value, on page 3 here. The value of the Verizon shares is a dividend and also part of the cost of the new holdings of Vodafone and Verizon shares.

In my answer to your original question in December I stated:

"The £13,187 return of value payment and the value of the Verizon shares of £33,161 are treated as dividends tax purposes with a 10% notional tax credit attached so the gross is £51,498 (£13,187 + £33,161 / 0.9). You will almost certainly have higher rate tax to pay on some or all of the dividend depending on how much other income you received in 2013/14."
Customer: replied 2 years ago.
Does this mean that what is called the Verizon dividend has already been taxed at 10 per cent?
Expert:  TonyTax replied 2 years ago.

The £33,161 is 90% of the deemed gross dividend of £36,846. The difference between the two figures is the notional 10% tax credit.