Taxation of Chargeable Gains Act 1992 section 124

Disposal of shares: relief in respect of income tax consequent on shortfall in distributions

Section 124 provides relief when computing a capital gain on the disposal of shares in a close company, where the shareholder has already been charged income tax on an apportionment of the company's undistributed income.

• When a close company's income is apportioned to a shareholder and income tax is paid under the apportionment rules, that income tax (so far as it relates to the shares being sold) can be deducted when calculating the chargeable gain on disposal of those shares. However, the deduction does not qualify for indexation allowance because it is not part of the original acquisition cost.
• The relief is withdrawn where the previously undistributed income that triggered the apportionment has actually been distributed to the shareholder before the shares are sold, and that distribution was exempt from tax. It also does not apply to any tax merely treated as having been paid rather than actually paid.
• Where the shareholder's income for a tax year spans more than one rate band, relief is calculated by treating the apportioned income as the top slice of the individual's income for that year, so that relief is given first at the highest applicable tax rate. If multiple apportionments apply, successive slices are taken working downwards from the top.
• When only some shares of the same class are sold, identification follows a first in, first out rule — shares acquired earlier are treated as disposed of before shares acquired later.