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HMRC internal manual

Capital Gains Manual

Reorganisations of share capital: bonus and rights issues: case law

TCGA92/S126(2)(a) does not form an exhaustive definition of the term ‘reorganisation of a company’s share capital’ as it applies to an increase in share capital. This was considered in the leading tax case on the subject, Dunstan v Young, Austen & Young Ltd (61TC448). In that case the Court of Appeal held that an increase in share capital can be a reorganisation even if it does not come within the precise wording of Section 126(2) ‘provided that the new shares are acquired by existing shareholders because they are existing shareholders and in proportion to their existing beneficial holdings.’ (61TC p471, paragraph H.) This means that there is a range of cases which do not take the form of a conventional bonus or rights issue but which should still be treated as reorganisations of share capital.

For example, an issue of shares by a wholly owned subsidiary to its parent may not take the form of a conventional rights issue with the subsidiary issuing a provisional letter of allotment. However, the trans-action may still be a reorganisation of share capital. Before deciding to challenge whether or not an issue of shares is a share reorganisation you should consider what difference it will make to the computation, see CG51765 and CG51846.

You may meet other arrangements, described as ‘open offers’ or ‘vendor placings’, instead of rights is-sues. These are discussed in CG51755+.