Selling or disposing of part of your shareholding

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Disposing of part of your shareholding: bonus and rights issues

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Bonus and rights issues

Disposing of part of your shareholding: bonus and rights issues

When your shareholding changes after a company reorganisation, you use special rules to work out the cost of your shares for Capital Gains Tax purposes. This guide explains how the rules work for sales or disposals in 2008-09.

On this page:

Typical company reorganisations
Bonus and rights issues of shares of the same class
Bonus issues and rights issues of shares of a different class
Stock dividends
If you sold your shares before 6 April 2008
More useful links

Typical company reorganisations

Companies usually reorganise shares in the following ways:

making bonus issues - this is when new ‘free’ shares are issued
making rights issues - this is when new shares are issued and you usually have to pay something for them
reorganising the value of shares - for example where ten 5p shares are replaced by one 50p share

When your shares are replaced with new shares, even though you no longer own your old shares, you're not treated as if you've sold or disposed of them for Capital Gains Tax purposes.

If you sell or dispose of part of your reorganised shareholding, you must use the special rules below to work out the cost of the shares you've sold.

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Bonus and rights issues of shares of the same class

If you sell or dispose of some shares in the same company of the same class, which you received following a company reorganisation by way of a bonus or rights issue, you follow the steps below to work out the cost of your shares.

Step 1 - work out the total cost

You combine - or pool - the cost of your shares by adding together any amount you paid for the new shares and the cost of the old shares already held.

Step 2 - work out the cost of the shares sold

You work out what proportion of the total pool of shares you've sold - then take the same proportion of the total pool cost.

The exception to this is if you've bought more shares of the same class in the same company on the day of the sale or in the next 30 days. In this case you're treated as if you sold the shares bought on the same day first, then the shares bought in the next 30 days - and you use their actual costs. You then follow steps 1 and 2 for any remaining shares sold.

Example - a rights issue of the same class of listed shares

You buy 800 shares in ABC plc for £1,000.

ABC plc offers a rights issue of one new share, costing £1, for every two shares held. You accept and receive 400 new shares and pay £400. You add the 400 new shares and the £400 cost to your existing shareholding.

You now have a pool of 1,200 shares, costing £1,400.

You sell 600 of the shares. You don't buy any more shares that day or in the next 30 days.

You've sold 50% of the pool of shares held (600 of 1,200 held). The cost of the shares sold is £700 (50% of the total cost of £1,400).

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Bonus issues and rights issues of shares of a different class

If you sell or dispose of some shares in the same company of a different class, which you received following a company reorganisation by way of a bonus or rights issue, you follow the steps below to work out the cost of your shares.

Step 1 - work out the value of the shares in each class

You've to work out the value of the different classes of shares in relation to each other before you can work out the cost of the shares you're selling or disposing of:

for shares listed on a recognised stock exchange you use the value on the day the shares are first listed after the reorganisation
for shares that aren't listed you use the value at the time you sell or dispose of any of the shares

You add up the total value of the different classes of shares. You then work out the proportion that each different class of share has of the total value.

Step 2 - work out the cost of the shares in each class

You work out the cost of each class of share held by splitting the total cost between the different classes of shares - in the same proportion as the proportional value worked out in step 1.

Step 3 - work out the cost of the shares sold

You work out what proportion of the total shares (of that class) you're selling. You use the same proportion of the share cost worked out in step 2 to find the cost of the shares sold.

The exception to this is if you've bought more shares (of the same class in the same company as those sold) on the day of the sale or in the next 30 days. In this case you're treated as if you sold the shares bought on the same day first, then the shares bought in the next 30 days - and you use the actual costs. You then follow steps 1 to 3 for any remaining shares sold.

Example - a rights issue of a different class of listed shares

You buy 800 ordinary shares in ABC plc for £1,000.

ABC plc offers a rights issue of one ‘A’ share (a different class from the ordinary shares), costing 25p, for every two shares held. You receive 400 ‘A’ shares and pay £100.

You now own 1,200 shares in the company, costing £1,100.

The 'A' shares are listed on the Stock Exchange with an initial value of 30p each. The ordinary shares had a value of £5 each on the Stock Exchange that day.

You sell 600 of your ordinary shares. You don't buy any more shares that day or in the next 30 days.

Step 1 - you work out the value of the ordinary class shares

'A’ shares value - you had 400 'A' shares, they were first listed on the Stock Exchange at 30p each, so their value is £120 (400 x 30p).
Ordinary shares value - you had 800 ordinary shares, their Stock Exchange value when the 'A' shares were first listed was £5 each, so their value is £4,000 (800 x £5).

So you own shares with a total value of £4,120 (£120 + £4,000). The value of the ordinary shares is 97% as a proportion of the total value (4,000/4,120 = 0.97).

Step 2 - you work out the cost of the ordinary class shares

You split the total share costs between the different classes of shares using the proportion worked out in step 1.

The total share costs are £1,100. Proportionally the value of the ordinary shares was 97%, so you allow 97% of the total costs of £1,100.

The cost of the ordinary shares is £1,067 (£1,100 x 97%).

Step 3 - you work out the cost of the ordinary shares sold

You've 800 ordinary shares in total but only sell 600 of them (600/800 have been sold).

So the cost of the 600 shares sold is £809 (600/800 x the ordinary share cost £1,067).

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Stock dividends

When a company issues a stock dividend, it usually gives you the option of taking the dividend as either shares or cash. In either case you'll be liable to Income Tax.

If you take the option of receiving shares, when you sell or dispose of them you can include the net amount you've already included in your Income Tax as an allowable cost for Capital Gains Tax.

When you work out the gain:

if the stock dividend shares were issued before 6 April 1998 you work out the cost in the same way as a rights issue following a company reorganisation (see above).
if they were issued on or after 6 April 1998 you work out the cost in the same way as any other new share - you can find more on this using the link below

Find out how to work out the cost of your shares

Find out more about Income Tax on UK dividends

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