Guidance

Capital Gains Tax: share reorganisation, takeover or merger

Calculate the cost of your shares in a company that's been taken over or has reorganised shares.

Company takeovers

When a company takes over another it can issue its own shares, securities or cash. Unless the issue is completely cash your shares in the old company are replaced with shares, securities or debentures in the new company.

As long as you meet certain conditions you’re not treated as if you’ve sold or disposed of any of the old shares for Capital Gains Tax purposes. One of those conditions is that the reorganisation applies equally to all holders of the class of shares being reorganised.

If the company taking over is listed on a stock exchange the information you get about the takeover will usually say whether these conditions are met.

You must pay Capital Gains Tax on any cash you get as part of the takeover

The most common types of transaction in a takeover are the issue of:

  • shares only
  • a mixture of shares and cash
  • securities

Shares

If the company taking over issues shares only you don’t pay Capital Gains Tax when you get the shares.

When you sell or dispose of your new shares they’re treated as if you bought them at the same time and cost as your original shares.

Shares and cash

If the company taking over gives you cash and shares you may have to pay Capital Gains Tax on the cash you get.

If you get a small amount of cash

You don’t pay Capital Gains Tax if both of the following apply:

  • you get less than £3,000 or an amount less than 5% of the value of your shares in the company, valued just before the takeover
  • the cash you get is less than the cost of your original shares

When you sell or dispose of your new shares and work out your capital gain your allowable cost will be the cost of the original shares less the amount of cash you get.

If you get cash that’s more than the cost of your original shares you need to work out your capital gain on the amount you get.

Calculate your capital gain:

  • in the way described for larger amounts of cash
  • on the difference between the cash you get and the cost of your original shares

You must elect to do this; it will reduce the cost of your new shares to nil. You do this in your tax return.

When you sell or dispose of your new shares you use a cost of nil to work out your capital gain.

Example

You get £2,000 cash and 2000 new shares in a company takeover.

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 gain on the excess of £500 (£2,000 - £1,500).

If you get a larger amount of cash

You may owe tax if:

  • you get shares and more than £3,000 cash
  • you get an amount that’s equal to or more than 5% of the value of your shares in the original company, valued just before the takeover

To work out your capital gain 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 you get and the new shares:

  • work out the value of the cash in proportion to the total value of the cash and shares you get
  • split the cost of your original shares between the cash and the new shares in the same proportion as the value

Example

You buy 800 ordinary shares in company A for £1,000.

Company B takes over company A.

You get 1,600 shares in company B with a value of £9,600 (£6 for each share).

You get cash of £3,200 (£4 for each company A share you held).

The sum of cash is more than £3,000, so you need to work out the capital gain.

First, work out the allowable cost:

  • the total value of cash and shares you get as a result of the takeover is £12,800 (£3,200 cash + £9,600 shares)
  • proportionally, the cash you got was 25% of the total value (3,200/12,800 = 25%).
  • split the total costs of £1,000 paid for the original shares - between the cash and the new shares in the same proportion

The allowable cost for the cash you got is £250 (25% x the £1,000 total cost).

Work out the taxable gain. This is £2,950 (£3,200 cash less £250 cost).

Securities

A company taking over may issue securities such as loan notes. You’ll get information about the takeover 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 takeover, 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 takeover.

Company share reorganisations

Companies may reorganise shares in the following ways:

  • make bonus issues - new free shares are issued
  • make rights issues - new shares are issued and you usually have to pay something for them
  • reorganise the value of shares - for example where they replace 10x5p shares with 1x50p share

When the company replaces your shares 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 shares you must use these rules to work out the cost of the shares you’ve sold.

Bonus and rights issues of shares of the same class

Work out the cost of your shares if you:

  • sell or dispose of some shares in the same company of the same class
  • got the shares following a company reorganisation as a bonus or rights issue

Work out the total cost:

  • combine 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 the cost of the shares sold:

  • the proportion of the total shares you’ve sold
  • the same proportion of the total combined cost

There’s 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 the shares bought:

  • on the same day first
  • in the next 30 days next

Use their actual costs. You then follow the steps above for any remaining shares sold.

Example

A rights issue of the same class of listed shares

You buy 800 shares in company A for £1,000.

Company A offers a rights issue of one new share, costing £1, for every 2 shares you hold.

You accept and get 400 new shares and pay £400.

You add the 400 new shares and the £400 cost to your existing shareholding.

You now have a total 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 total shares you hold (600 of 1,200 held). The cost of the shares sold is £700 (50% of the total cost of £1,400).

Bonus and rights issues of shares of a different class

Follow these steps to work out the cost of your shares if you:

  • sell or dispose of some shares in the same company of a different class
  • got the shares following a company reorganisation as a bonus or rights issue

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

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.

If the shares are listed on a recognised stock exchange use the value on the day the shares are first listed after the reorganisation.

If they aren’t listed use the value at the time you sell or dispose of any of them.

Add up the total value of the different classes of shares. 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:

  • split the total cost between the different classes of shares
  • use the same proportion as the proportional value you worked out in step 1

Step 3 - work out the cost of the shares you’ve sold:

  • 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:

  • the shares bought on the same day first
  • the shares bought in the next 30 days

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 company A for £1,000.

Company A offers a rights issue of one ‘A’ share (a different class from the ordinary shares) costing 25p for every 2 shares held. You get 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 and don’t buy any more shares that day or in the next 30 days.

Step 1 - 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. Their value is £120 (400 × 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 × £5)

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 - work out the cost of the ordinary class shares:

  • 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 × 97%).

Step 3 - 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). Therefore, the cost of the 600 shares sold is £809 (600/800 × the ordinary share cost £1,067).

Rights that you give up or sell on

You usually accept a rights offer by paying for the shares. But you may decide to sell your right to get new shares to someone else. Or turn down the offer and take cash instead. The cash you get is treated as a part disposal of your shareholding.

There is no Capital Gains Tax to pay on the cash you get if both of the following apply:

  • you get a ‘small’ amount of cash, usually less than £3,000 or an amount less than 5% of the value of your shares in the company - valued just before the rights issue
  • the cash you get is less than the cost of your original shares

Later, when you sell or dispose of your shares you must work out your Capital Gains Tax. Your allowable cost will be the cost of the original shares less the amount of cash you got.

If the amount you get 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 if you need help with this.

Stock dividends

When a company issues a stock dividend it usually gives you the choice of taking the dividend as either shares or cash. In either case you’ll have to pay Income Tax.

If you choose to get shares you must 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 work out the cost in the same way as:

  • a rights issue following a company reorganisation if the stock dividend shares were issued before 6 April 1998
  • any other new share if they were issued on or after 6 April 1998
Published 6 November 2014