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There are special rules you use to work out the cost of shares and securities for Capital Gains Tax purposes when a company is taken over by another company. This guide explains how the rules work for sales or disposals in 2012-13.
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When a company takes over another it may issue its own shares, securities or cash in return for the shares it's buying.
When your shares in the old company are replaced with shares, securities or debentures in the new company. Provided you meet certain conditions, you're not treated as if you've sold or disposed of the old shares for Capital Gains Tax purposes. If the company carrying out the take-over is listed on a stock exchange the information you receive about the take-over will usually say whether these conditions are met. You may be liable to Capital Gains Tax on any cash received as part of the take-over.
If you sell or dispose of part of your reorganised shareholding, you must use special rules to work out how much the shares cost.
The most common types of transaction in a take-over are:
If the company carrying out the take-over issues shares only, you don't pay Capital Gains Tax when you receive the shares.
When you sell or dispose of your new shares, they're treated as if they were bought at the same time and cost as your original shares.
If the company carrying out the take-over gives you cash and shares, you may have to pay Capital Gains Tax on the cash you receive.
There is no Capital Gains Tax to pay if both of the following apply:
When you sell or dispose of your new shares and work out your Capital Gains Tax, your allowable cost will be the cost of the original shares less the amount of cash received.
If you receive cash that is more than the cost of your original shares, you need to work out your Capital Gains Tax on the amount received. You can do either of the following:
You receive £2,000 cash and 2000 new shares in a company take-over.
Your original shares in the old company cost £1,500.
The sum of cash is small but it's more than the original cost, so you need to work out the capital gain.
You elect to reduce your allowable costs to nil and to be taxed on the excess.
You'll need to work out the Capital Gains Tax on the excess of £500 (£2,000 - £1,500).
If you receive shares and more than £3,000 cash, you may owe tax on the cash payment. This also applies if you receive an amount that is equal to or more than 5 per cent of the value of your shares in the original company just before the take-over.
To work out your Capital Gains Tax you need to allocate a 'cost' to this cash payment. You do this by splitting the original cost of the shares proportionally between the cash received and the new shares.
Step 1 - Work out the value of the cash received in proportion to the total value of the cash and shares received.
Step 2 - Split the cost of your original shares between the cash and the new shares in the same proportion as the value.
You buy 800 ordinary shares in ABC plc for £1,000.
Company XYZ takes over company ABC.
You receive 1,600 shares in XYZ plc with a value of £9,600 (£6 per XYZ plc share) and cash of £3,200 (£4 for each ABC plc share you held).
The sum of cash is more than £3,000, so you need to work out the capital gain.
You first work out the allowable cost.
Step 1 - The total value of cash and shares you receive as a result of the take-over is £12,800 (£3,200 cash + £9,600 shares).
Proportionally, the cash received was 25% of the total value (3,200/12,800 = 25%).
Step 2 - You split the total costs of £1,000 - paid for the original shares - between the cash and the new shares in the same proportion.
So the allowable cost for the cash received is £250 (25% x the £1,000 total cost).
You then work out the taxable gain. This is £2,950 (£3,200 cash received less £250 'cost').
A company carrying out a take-over may issue securities, such as loan notes. Usually you'll receive information about the take-over that explains if they're 'Qualifying Corporate Bonds'.
If the loan notes are Qualifying Corporate Bonds, you work out the gain as if you'd sold your original shares at their market value immediately before the take-over. But the gain isn't chargeable to Capital Gains Tax until you sell or dispose of the Bonds.
If the loan notes aren't Qualifying Corporate Bonds, they're treated in the same way as shares issued in a take-over.