One of the most challenging CGT scenarios in practice arises when a client comes to you with a disposal of shares — often built up over many years through a combination of purchases, gifts, and corporate reorganisations — and simply cannot tell you what any of those shares originally cost. Brokers no longer hold historical records, the original share certificates have been lost, and the company they once held shares in may not even exist anymore.

This guide walks through the legal framework, the practical steps to reconstruct the cost base, how gifted shares and reorganisations affect the position, and how to present a defensible computation to HMRC — with a worked example to bring it all together.

Why This Problem Arises

Over a twenty-year holding period, shares can change hands in ways that make original cost almost impossible to track from memory alone. The most common scenarios we see are:

• Shares purchased many years apart, sometimes in tranches, with no consolidated record of cost
• Shares gifted between family members — where the recipient may never have known the cost, and the donor has long since lost records
• Corporate mergers, demergers, rights issues, and share-for-share exchanges that resulted in shares in a new entity replacing shares in the original one
• Pre-1982 holdings subject to the rebasing rules

The fundamental principle of CGT is straightforward: gain = proceeds minus allowable cost. But when the cost is unknown, practitioners must work methodically through the legislation to arrive at the correct figure — never simply assuming a nil cost base, which is both technically incorrect in most cases and almost always unfair to the client.

Step One: Establish the Correct Share Identification Order

Before any cost calculation can begin, you must identify which shares were disposed of. Under TCGA 1992, shares are not identified on a simple first-in, first-out basis. The statutory matching rules TCGA 1992 s.105–107 apply in this strict order:

In most long-term holding scenarios, neither rule 1 nor rule 2 will apply, and the entire disposal will be matched against the Section 104 pool. The challenge then becomes reconstructing what is in that pool and at what cost.

The Section 104 Pool: How It Works

The Section 104 pool TCGA 1992 s.104 treats all shares of the same class in the same company as a single pooled asset. Rather than tracking individual share lots, the pool holds a cumulative total of shares and a cumulative total of allowable expenditure. When shares are sold, a proportionate fraction of the pooled cost is allocated to the disposal.

The key formula is:

This averaging mechanism is both the solution to — and occasionally the source of — uncertainty in base cost calculations. Every purchase, gift, or reorganisation that added shares to the pool must be reflected in the total pooled cost. If some of those events are undocumented, the pool cost will be understated.

Dealing with Gifted Shares: The Market Value Rule

When shares are gifted (i.e. transferred at no consideration, or at undervalue, between connected persons), the recipient does not take over whatever the donor paid. Instead, under TCGA 1992 s.17 & s.18, both the donor's disposal and the recipient's acquisition are treated as occurring at market value at the date of the gift.

This means:

• The donor is treated as having received market value for CGT purposes on the date of the gift
• The recipient acquires the shares at that same market value — which becomes their base cost going into the Section 104 pool
• If Gift Relief was claimed under TCGA 1992 s.165 (available where the shares are in a qualifying trading company), the gain is held over and the recipient takes over the donor's original base cost instead

To reconstruct the market value at the date of an old gift, you will typically need to approach the original company (or its successor) for historical share price data, review Companies House filings for the relevant period, or engage a specialist valuer for unquoted shares.

Shares Acquired by Inheritance

If shares were inherited (rather than gifted), the acquisition cost is the probate value at the date of death — the value agreed with HMRC for Inheritance Tax purposes. This is usually documented in the estate accounts. It is a common error to treat inherited shares as having a nil cost; they do not. TCGA 1992 s.62 is clear that the deceased is treated as having disposed of the asset at market value, and the legatee acquires at that same value.

Shares Acquired Through Corporate Reorganisations

This is frequently the most complex area. A client holding shares in "Company B" may in fact be holding the economic successor to shares they originally held in "Company A", following a merger or reconstruction. The cost base does not reset — it threads back through the corporate history.

The No-Disposal Rule: s.127 TCGA 1992

Under TCGA 1992 s.127, where a company reorganises its share capital (for example via a bonus issue, rights issue, or subdivision), the reorganisation is not treated as a disposal of the original shares or an acquisition of new shares. Instead, the original shares and the new holding are treated as the same asset, acquired at the same time and at the same cost as the original shares.

This provision is mandatory — it is not a relief that must be claimed. It applies automatically where the conditions are met.

Share-for-Share Exchanges: s.135 TCGA 1992

Where a shareholder exchanges shares in Company A for shares in Company B (for example, in a takeover), TCGA 1992 s.135 extends the s.127 treatment. The exchange is treated as a reorganisation. No disposal arises, and the new shares in Company B are treated as the same asset as the original shares in Company A — acquired at the same time and for the same cost.

As HMRC's own Capital Gains Manual confirms at CG52579, the new shares "are treated as the same asset as the old shares and acquired at the same time and for the same cost as the old shares." This means that when your client eventually sells Company B shares, you must trace back the original cost of the Company A shares to establish the allowable expenditure.

Schemes of Reconstruction: s.136 TCGA 1992

Where the whole or part of a company's business is transferred to another company as part of a formal scheme of reconstruction, TCGA 1992 s.136 applies a similar no-disposal treatment. Shareholders receive shares in the new entity; those new shares stand in the shoes of the old shares as regards timing and cost. The scheme must meet the definition of a "scheme of reconstruction" in Schedule 5AA TCGA 1992.

Demergers and Apportionment

Where a demerger results in a shareholder holding shares in two companies where they previously held shares in one, the original pool cost must be apportioned between the two holdings. The apportionment is typically done by reference to the relative market values of the two new holdings immediately following the demerger. HMRC guidance at CG51700 covers the mechanics of this apportionment for the Section 104 pool.

Practical Steps to Reconstruct the Cost Base

When a client arrives with no records, work through the following process before attempting any computation:

CGT Rates for 2025–26

Following the Autumn Budget 2024 changes, the rates applying to share disposals from 30 October 2024 onwards are:

The annual CGT exemption for 2025–26 is £3,000 per individual.

Worked Example: Twenty Years of Mixed Acquisitions

The following example illustrates how to reconstruct the Section 104 pool where shares were acquired by purchase, gift, and corporate reorganisation over a twenty-year period.

What If Records Cannot Be Fully Reconstructed?

Even after diligent enquiry, there may be gaps. In these situations:

• Estimate using available evidence. HMRC accepts reasonable estimates supported by contemporary evidence such as published share prices, dividend statements, or professional valuations. A stated methodology is always better than silence.
• Consider a partial nil cost as a last resort — with caveats. If a specific acquisition tranche genuinely cannot be valued (e.g. a very old gift where the company is dissolved and no records exist anywhere), a nil cost for that element may be the only defensible position — but document why.
• Request a non-statutory clearance or Post-Transaction Valuation Check. HMRC's CG34 form allows you to agree the valuation methodology before filing. HMRC has at least three months to respond, so plan accordingly.
• Be transparent in the return. Use the "additional information" box on the Self Assessment return to note that cost base reconstruction was required and briefly describe the methodology. This reduces the risk of a later discovery enquiry on the basis that the return was careless.

Key Legislative References at a Glance

Summary: The Adviser's Checklist

1. Obtain every document the client holds — certificates, correspondence, estate accounts, dividend statements
2. Contact share registrars and Companies House to reconstruct the transaction history
3. For each acquisition, determine the correct cost: purchase price, market value at gift date, probate value, or rolled-over cost from a reorganisation
4. Check whether Gift Relief was claimed on any gifted shares — this changes the recipient's cost base entirely
5. Trace the cost through any corporate reorganisations using s.127, s.135, or s.136 as appropriate
6. Build the Section 104 pool chronologically and calculate the average cost
7. Apply the s.105–107 matching rules to identify which shares were sold
8. Consider a CG34 post-transaction valuation check for any estimated values
9. Document all assumptions and sources in the file and disclose the reconstruction methodology in the return