A rights issue in respect of employment-related securities will be an employment-related securities option, potentially charged under Chapter 5. However, such a gain will rarely arise, because the rights issue will reduce the value of the existing holding. Relief for such a reduction in value is provided by ITEPA03/S480 (3). So if there is a single class of shares and a one-for-one rights issue at a discount, each existing share will reduce in value. For example, assume the share price was originally £1, there were 1,000 issued shares, and the rights issue was priced at 50p; then:
|Shares||Value of company||MV Share|
|Original||1,000 @ £1||£1,000||£1|
|Rights Issue||1,000 @ 50p||£1,500||75p|
Example 1 – rights issue
Dana owned a number of shares in her employer, Gadgets Ltd. Each share was worth £1 and she paid 50p for a second share on each in a rights issue. She has now paid 50p for a share worth 75p, a 25p gain. But against this Dana can claim a reduction in value of each original share, reduced from £1 to 75p, which is a 25p loss. The net result is no gain and no loss.
If Dana sells her right for 25p (75p share value less 50p price) she can make a 25p gain on disposal of a securities option. Against this she can claim a reduction in value of each original share, reduced from £1 to 75p, which is a 25p loss. So again the net result is no gain and no loss.
Example 2 – rights issue with value transfer
Elliot is also an employee of Gadgets Ltd, but the company considers they need to offer senior sales staff more remuneration incentives. So the senior sales force all have A shares, which can be a vehicle for different dividends and benefits, whereas everyone else has ordinary shares. If there is a rights issue at a discount just to the A shareholders, then value will have been transferred from the ordinary shareholders to the employees and a charge to tax may arise.
In practice, problems are unlikely to arise where employees hold quoted shares. Where the shares are unquoted, an examination of the circumstances should quickly determine whether value has been transferred from one group of shareholders to the employees. Trivial differences, for example, if a couple of minority shareholders have failed either to take up or to sell their rights, should be ignored.