Q&A

What is my capital gain if I sell the Irish Permanent shares I received upon the company going public together with those loyalty shares I have since received for holding on to my original allocation; what taxes are due; how do I pay these; and to whom do I go to sell the shares?Mr A.R., Dublin.

The questions posed by Mr A.R. reflect those increasingly asked by the growing number of small investors who have received shares as a result of recent flotations by previously-mutualised groups. Most particularly, these include former members of Irish Permanent and Norwich Union and, soon, eligible members of the First National Building Society.

Many of these, such as Mr A.R., are pensioners or people who might never previously have dealt in shares and find the process somewhat confusing. At times, the imposing nature of the financial services industry, including stockbrokers, together with the formalised structure of annual reports does little to enlighten such shareholders. In essence, however, the procedure for both calculating the gain and tax due and for selling the shares is relatively simple.

Calculating the gain

The process is the same for any windfall shares but, taking Mr A.R.'s case, he holds the 300 original windfall shares given him by Irish Permanent, together with two sets of 15 additional shares for leaving his windfall untouched for the financial services group's first two years as a public company as a total of 330 shares.

At last Friday's closing price, 845p or £8.45, the capital gain would be: 330 [X] 8.45 = £2,788.50.

Mr A.R. has an annual capital gains allowance of £1,000. He does not say whether he is married and, if so, whether his spouse is still living. If she is, he would be entitled to use her allowance, a further £1,000. This provision will change in April. Thereafter the individual allowance will be lowered to £500 and there will be no transferability between spouses.

To calculate Mr A.R.'s tax liability, we simply take the £2,788.50 and deduct the allowance. If he is alone, that leaves £1,788.50 on which tax is payable; if he has a spouse, the amount qualifying for tax is only £788.50. This assumes that Mr A.R. nor any spouse has made another capital gain during this tax year and capital gains are cumulative for tax purposes i.e. only the first £1,000 per spouse is tax free over the course of the whole tax year April 1st, 1997 to March 31st, 1998 in this case.

At a tax rate of 20 per cent, which is the applicable rate since the Budget in December, Mr A.R. will be liable to pay:

£1,788.50 [X] 20% = £357.70 if he has only his own allowance;

or £788.50 [X] 20% = £157.70 if he is using the allowance of a spouse.

Paying the tax

To pay this tax, Mr A.R. needs to apply to the Revenue Commissioners for a capital gains return form, CG1. It is the investors' responsibility to do so, not the institution in which they hold the shares. If they fail to fill out the form and pay the appropriate tax, they leave themselves open to subsequent prosecution by the Revenue Commissioners.

In answer to a couple of minor points raised by Mr A.R. in his letter, there is no other tax payable on the capital gain apart from capital gains tax and, yes, any dividend he has been paid will have been paid net of tax, so he has no liability there.

On the question of where to go to sell the shares, most stockbrokers charge similar rates of commission on stock sales. However, it does no harm to shop around as there can be special deals, especially on windfall shares, in the period shortly after the company goes public.

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