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HMRC internal manual

Capital Gains Manual

Reorganisations of share capital: compensatory open offers (COOs): tax treatment of new shares

The tax consequences of a compensatory open offer will depend on the precise nature of the transactions by which the offer is effected and, in particular, the source of any compensation element and how it is passed to the non-subscribing shareholders. Enquiries may be needed in each case to determine the facts.

Interest tends to focus on the treatment of the cash compensation payment in the shareholder’s hands (see CG51759), but as the account in CG51757 shows there may be other receipts by the shareholder which could result in chargeable gains.

To the extent that a shareholder receives new shares pro-rata to their existing shareholding (‘pro-rata shares’) they have participated in a reorganisation of share capital within TCGA92/S126 and so they are treated as not having disposed of their original shares. The pro-rata shares and the original shares constitute the new holding and the subscription price given for the new shares is part of the acquisition cost of the new holding (see CG51700).

Shares received by an existing shareholder over and above the number they are entitled to by virtue of their original shares are not allotted in proportion to those original shares and so are not issued as part of a reorganisation of share capital. In receiving those further shares the shareholder may have obtained an advantage over investors who were not already shareholders; if so then they may have received a capital sum derived from their assets and TCGA92/S22 will then apply to deem there to have been a disposal and -potentially- a chargeable gain.

If the further shares were acquired at a discount to the price available to non-shareholders then the capital sum received is the amount of the discount (TCGA92/S22(3)). There has been a disposal and so a gain must be computed, using the value of the capital sum as consideration.

If the further shares were acquired at the same price as that available to non-shareholders, but existing shareholders enjoyed priority in allotment of shares at that price, it may be difficult to prove the existence of, or to quantify, any money’s worth received by the shareholder. In such cases you may find as a question of fact that there is no money’s worth and so there will be no actual or deemed disposal connected with the acquisition of the further shares.