Capital Gains Tax - Investment Clubs Frequently Asked Questions

 

What is an Investment Club?

Generally speaking investment clubs comprise a group of friends, neighbours or work colleagues who meet together on a regular basis, pooling their spare cash to buy and sell shares on the stock market.

Does the club have to pay tax?

Investment Clubs are not charged to Corporation Tax. The individual member is charged to tax on their proportionate share of any income or gains and is entitled to relief in respect of any share of capital losses.

Can people who are not resident in the UK join an investment club?

The Revenue has no objection to non residents joining an investment club. However, the tax rules in the overseas country where the investor is resident may not be the same as in the UK. Non resident members should check for themselves the tax situation locally.

Does the club need a constitution and rules?

Yes. The club should have a constitution and rules, to provide an organisational framework and points of contact for correspondence and official notices. A constitution is also essential to protect the interests of club members.

Where can our investment club find a constitution and rules?

The Inland Revenue is unable to offer a model constitution and rules or to give advice on drawing these up. It is a legal matter and not within our remit. ProShare (UK) Ltd publish a draft constitution and rules which your club can adapt as necessary, but use of this model is not compulsory.

Do I need to register the club with the Inland Revenue?

The Treasurer, Secretary or other official of the club should notify the local tax office of the club's existence and of the address that office should use for official correspondence. The local office will issue the appropriate letters and forms to that person.

How do I know what my share of the club's income e.g. dividends from shares, and gains are?

An appointed club officer, normally the Treasurer, will be responsible for keeping a record of the clubs dealings in stocks and shares. He or she will apportion any income, gains and losses between the members in accordance with the rules of the club, and should provide each member with a written statement of these for each tax year.

How do I declare my share of income and gains from investments made by the club to the Inland Revenue?

Every club member should declare their apportioned share of income or gains received from investments made by the club on his/her Self Assessment Tax Return.

However, a member does not have to declare their share of investment club gains to the Revenue if:

  • those gains, together with any other chargeable gains of the year are less than the Annual Exempt Amount (£7,700 for the tax year ending 5 April 2003) and
  • his or her share of the proceeds from the sale of shares by the club in the tax year, together with any other proceeds from the disposal of other assets, is less than twice the Annual Exempt Amount (£15,400 for the tax year ending 5 April 2003).

Do I still have to declare my share of any gain arising from a disposal of shares held by the Club even though the gain has been retained for re-investment rather than being distributed to me?

Yes, Club members will be chargeable to tax on gains whether such gains are retained by the Club for re-investment or distributed to Club members.

Is Taper Relief available against my share of the gains from investments made by the club realised by the club whilst I'm a member ?

Taper Relief may be available. It will depend upon the circumstances of each individual member, rather than the circumstances of the club. So each member will have to calculate his or her own entitlement to the relief on each gain from club investments allocated to him or her.

In deciding what Taper Relief is due on any chargeable gain, the member will have to decide whether the chargeable gain is on a business or a non-business asset, and how many whole years there are in the member's qualifying holding period.. The statement of a member's share of gains for the year supplied by the club (form 185(New)) should indicate, for each investment sold, the time(s) on which it was acquired, and, for each member, the date the member joined the club. The qualifying holding period will commence on the latest of

  • 6 April 1998,
  • the time of acquisition of the investment, and
  • the date the member joined the club.

Further information on the calculation of Taper Relief, or on other aspects of Capital Gains Tax, can be found in booklet CGT1 available by contacting the Inland Revenue Orderline or by visiting our website www.inlandrevenue.gov.uk. This booklet explains how to work out the chargeable gain, the rules that determine when and for what period an asset is a business or a non-business asset and the amount of taper relief due.

Can I start a club with some friends and transfer shares that I already own into the club?

If you do this, you could incur an immediate tax liability if the value of the shares has gone up since you originally acquired them. This is because the transfer to the club is treated as a disposal of an interest in the shares to the other club members, because you would no longer own the shares absolutely, but would own them jointly with the other club members. The shares would have to be valued at the transfer date to establish the amount of your gain or loss for tax purposes.

What are the tax consequences if I leave a club?

When you leave, the club will pay you the value of your share of the club's investments. And the occasion of your departure represents a disposal of your share of those investments for capital gains tax purposes. To calculate the chargeable gain on this occasion, you will need to deduct from the amount you receive from the club the total of

  • the sums you have paid into the club from time to time (together with any indexation allowance up to 5 April 1998 relating to those payments, and
  • the amounts of income (net of tax or tax credit) and gains allocated to you for each year you were a member, adjusted for
  • any losses allocated to you each year, and any sums paid out to you by the club in the past.

Any Taper Relief on this gain will be calculated on the basis that you have disposed of a non-business asset, with a qualifying holding period equal to the length of time you were a club member. However, if you became a club member before 6 April 1998, the qualifying holding period will not start until that date. CGT1 explains the relevance of the qualifying holding period for working out the amount of taper relief due.

Can an investment club only invest in shares & securities traded on the London Stock Exchange?

No. The Revenue has no rules regarding the nature of the investments made by such a club. Generally, funds are invested on the London Stock Exchange, but they can also be invested in other assets, including foreign shares and securities, or they can be held on deposit in a bank account.

Where can I find out more about investment clubs generally?

ProShare Investment Clubs is part of ProShare (UK) Ltd which is an independent, not-for-profit organisation funded by the London Stock Exchange and industry which exists to promote the benefits of owning shares. You can contact them at ProShare (UK) Ltd., Centurion House, 24 Monument Street, London, EC3R 8AQ or try their website www.proshareclubs.co.uk

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