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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Capital distributions: rights issue: computation

The normal computational rules of TCGA92/S122 apply including the rules on small capital distributions.

Example

  • June 1990 Mr Butcher buys 20,000 shares in Lloyds Chemists Plc at a price of 160p per share.
  • May 1991 Lloyds Chemists Plc declares a 1 : 2 rights issue at 230p per share. Mr Butcher sells all his rights for 35p per entitlement to each new share. 10,000 x 35p = £3,500.

The market value of Lloyds Chemists Plc shares at the date of the capital distribution was 267.5p per share.

Value capital distribution = £3,500 x 100 = 6.5%

Value shareholding                  £53,500

The capital distribution is not small see CG57836. So the sale of the rights is treated as a disposal.

CAPITAL GAINS TAX COMPUTATION

Pool of indexed expenditure

£33,728 x          £3,500                       = £2,070

                      £3,500 + £53,500

Pool of qualifying expenditure

32,000 x            £3,500                     = £1,964

                     £3,500 + £53,500

 

Indexation =    £2,070 - £1,964           = £106

      £  
         
  Disposal proceeds   3500  
less Cost   1964  
    Unindexed gain 1536  
less Indexation   106  
    Chargeable gain 1430  

SECTION 104 HOLDING

  No of shares Pool of qualifying expenditure Pool of indexed expenditure  
         
Acquisition 20000 £32,000 £32,000  
Indexation Allowance June 1990-May 1991 0.054     £1,728  
  20000 £32,000 £33,728  
Capital distribution   (£1,964) (£2,070)  
  20000 £30,036 £31,658  

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. Companies and other concerns within the charge to Corporation Tax are not affected by these changes. For indexation allowance see CG17207+ and for taper relief see CG17895+.