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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 2010-11.
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Companies usually reorganise shares in the following ways:
When your shares are replaced with new 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 special rules to work out the cost of the shares you've sold. There are explanations of these rules below.
Follow the steps below to work out the cost of your shares, if you
Combine - or pool - the cost of your shares. Add together any amount you paid for the new shares and the cost of the old shares you already held.
Work out what proportion of the total pool of shares you've sold. Then take the same proportion of the total pool cost.
There is one exception to this. 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:
You use their actual costs. You then follow steps 1 and 2 for any remaining shares sold.
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 per cent 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).
Follow the steps below to work out the cost of your shares if you
First work out the value of the different classes of shares in relation to each other. Next work out the cost of the shares you're selling or disposing of:
Add up the total value of the different classes of shares. Then work out the proportion that each different class of share has of the total value.
Work out the cost of each class of share held by splitting the total cost between the different classes of shares. Use the same proportion as the proportional value you worked out in step 1.
Work out what proportion of the total shares (of that class) you're selling. Use the same proportion of the share cost worked out in step 2 to find the cost of the shares sold.
There is one exception to this. 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:
Use the actual costs.
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.
So you own shares with a total value of £4,120 (£120 + £4,000). The value of the ordinary shares is 97 per cent 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 per cent, so you allow 97 per cent of the total costs of £1,100.
The cost of the ordinary shares is £1,067 (£1,100 × 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 × the ordinary share cost £1,067).
You usually accept a rights offer by simply paying for the shares. But you may decide to sell your right to receive new shares on to someone else or turn down the offer and take cash instead. The cash you receive is treated as a part disposal of your shareholding.
There is no Capital Gains Tax to pay on the cash you receive if both of the following apply:
Later, when you sell or dispose of your shares you'll need to work out your Capital Gains Tax. Your allowable cost will be the cost of the original shares less the amount of cash received.
If the amount you receive for the sale of rights is greater than the amounts shown above, the sale is treated as a disposal. You'll need to work out the Capital Gains Tax. Contact HM Revenue and Customs (HMRC) if you need help with this.
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, you'll need to work out your gain 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:
Find out how to work out the cost of your shares
Find out more about Income Tax on UK dividends
