Ask Money: a reader queries the tax implications for investors in LF Woodford Equity Income ahead of payments being returned to investors at the end of January.
I'm looking for guidance on how the winding up of LF Woodford Equity Income should be treated for tax purposes. I expect that this might be a subject that quite a few of your readers will also need to understand.
Let's suppose I paid 120p for some units, and I receive 60p for each of those units from the January payment, and the estimated total payments will eventually be 85p per unit. Would I, for this tax year:
- put this down as a loss of 60p per unit (120p-60p)
- put this down as a loss of 35p per unit (120p-85p)
- something else?
Then, in future tax years, if there is money returned beyond the 'sale price' that I've used (so 60p or 85p above), would that then go down as a gain in that later tax year?
Richard Murrant, by email
Nimesh Shah of Blick Rothenberg replies: The winding-up of the company is complicated and every shareholder should take their own advice, as everyone will have different outcomes depending on the exact circumstances and shareholder history. I’d expect the LF Woodford Equity Income fund to publish guidance notes to their affected shareholders around the UK tax treatment.
In broad terms, capital distributions received on the liquidation/winding-up of a company are regarded as ‘part disposals’ for capital gains tax purposes. For each part disposal, a capital gain or loss could arise, depending on the exact figures and history. The capital gain/loss is calculated under a prescribed formula set out in the tax rules, see below.
Proceeds is the distribution received.
The cost to deduct from the proceeds in order to calculate the capital gains is calculated as follows:
A/A + B x COST.
A is the amount received for the part disposal i.e. the distribution.
B is the market value of the remaining asset.
COST is amount the asset was acquired for.
The cost used cannot be deducted again in the future and the original base cost is reduced accordingly to calculate future capital gains/losses on subsequent distributions.
A part disposal may not arise if the amount distributed is ‘small’ – under the tax rules, ‘small’ means 5% or less than the value of shares or you receive less than £3,000. You need to complete these calculations carefully as you may still have capital gains tax to pay if the amount you receive is more than the cost of the original shares.
If you need help with a tax, pension or financial planning problem, please email: firstname.lastname@example.org