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HMRC internal manual

Capital Gains Manual

Definitions: issue of shares: letters of allotment

For Capital Gains Tax purposes shares specified in a letter of allotment are treated as issued unless the right to the shares remains provisional until acceptance and there has been no acceptance, TCGA92/S288(5). The following provides an example of when this is most likely to occur but the rule can equally apply to any section of the TCGA where consideration has to be given as to when shares have been issued.

Generally the definition within section 288(5) will be of most relevance when a public company intends to make a bonus issue or a rights issue. The public company will usually issue a letter of allotment which is a letter sent to the prospective subscribers, ie. the existing holders of shares in respect of which the offer is made, saying that the shares have been allotted to them. The shareholder may pay for the shares in full but the shares will not be issued until some time later when the formalities have been completed. In such a case for the purposes of the TCGA the date that shares are treated as having been issued is the date of the letter of allotment.

If the shares in respect of which the bonus issue or rights issue is made are themselves comprised in a letter of allotment, section 288(5) can apply to those shares also.

You are most likely to come across provisional letters of allotment when dealing with rights issues. The company will issue renounceable letters of allotment to its existing shareholders allowing them to subscribe for further shares. The letter of allotment remains provisional until the shareholder has accepted the offer and paid for the new shares. Because the letter of allotment usually allows the holder to buy shares at below the current market price it has some value. Therefore, shareholders who do not want to take up the offer can sell the right to subscribe for the shares. See CG57855 for the treatment of the sale of rights nil paid.