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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Incentive payments/financial institutions: other inducements: specific points

This section deals with specific points that may apply to investors who are entitled to either free shares or a cash bonus on demutualisation of a building society.

Multiple accounts 

Where an investor has more than one share account with the building society each account is treated as a separate asset for Capital Gains Tax purposes. This means that a separate calculation is required for each account when cash bonuses are paid. However, any free shares issued will be subject to the pooling rules in TCGA92/S104+, see CG51575.

Free shares sold immediately 

Investors may arrange for the immediate sale on their behalf of any free shares to which they become entitled. Normally the successor bank will do this through an internal share dealing service. Instead of receiving a share certificate the investor will receive the net proceeds of sale.

This does not mean that the investor should be treated as receiving a cash bonus rather than shares. Even if the shares are sold immediately, the investor has still acquired the beneficial interest in those shares on vesting day. A sale of the shares by the successor bank on the investor’s behalf is a disposal of that beneficial ownership. The proceeds of sale received by the investor should be treated as the disposal consideration for the shares.

Statutory bonuses 

Investors whose share accounts had not been open for more than two years are not entitled to vote on the demutualisation resolution.

Normally such investors will not be entitled to anything more than is provided for in the Building Societies Act (BSA) 1986, namely:

  • a deposit account with the successor bank and
  • a statutory cash bonus.

This cash bonus should be treated in exactly the same way as any other cash bonus, see under ‘Share account holders’ above.

Joint accounts 

The BSA 1986 requires a building society to regard only the first-named holder of a share account as the ‘member’. Subject to the terms of the Transfer Document this usually means that only the first-named account holder will have the right to vote on the demutualisation resolution. That person will also be entitled to any cash bonus or the right to any free shares. Any share certificate in respect of those shares will normally be issued in the name of that person.

This does not necessarily mean that we treat the first-named account holder as being the only recipient of the cash bonus or shares for Capital Gains Tax purposes. In most cases, the first-named account holder will simply obtain the cash bonus or shares wholly or partly on behalf of all of the account holders.

However, you will need to have regard to the facts of each particular case. For example, certain societies may make specific arrangements in respect of nominee accounts that enable cash payments to be made to all of the account holders rather than just the first-named.

Where the building society account that gave rise to the receipt of a cash bonus or free shares was a joint account between spouses beneficial ownership will rest with both spouses. The cash bonus or free shares should be treated as being received by them in equal shares.

Child accounts, nominee accounts and client accounts 

Where the building society account that gave rise to the receipt of a cash bonus or free shares:

  • was an account held by a parent or guardian on behalf of a minor child or
  • was a nominee account, for example, an account held by a carer on behalf of an aged or incapacitated person or
  • was a client account, for example, one held by a solicitor on behalf of a particular client,

beneficial ownership will rest with the child, the aged or incapacitated person or the client as the case may be. The cash bonus or free shares should be treated as being received wholly by that child, person or client.

Partnership accounts 

Where the account that gave rise to the receipt of the cash bonus or free shares was a partnership account (for example, one held by a named partner on behalf of himself and all other partners) beneficial ownership would rest with all the partners. You should treat any cash bonus or free shares issued to the partnership as being received by all the partners in accordance with their fractional shares, see CG27220.

PIBS 

Certain building societies offer what are known as PIBS (‘Permanent Interest Bearing Shares’). These are treated as Qualifying Corporate Bonds, TCGA92/S117(4)(5), and, as such, there is no chargeable gain on their disposal, see CG56800.

Where an investor in a building society had a share account in the form of a PIBS, any cash bonus received in respect of that account does not give rise to a chargeable gain.