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HMRC internal manual

Capital Gains Manual

Value shifting: failure to take up rights

A company may make an offer of a rights issue of shares to its shareholders. See CG50290+ for advice on rights issues. If all the shareholders take up their entitlements there will be no change in the proportion of shares held by each shareholder. There will be no shift in value in these cases, even if the rights issue shares are offered at less than their market value.

Controlling shareholders may however arrange that the company will make a rights offer at less than market value, with the intention that they will not take up their entitlements. For example, S Ltd has an issued share capital of 100 £1 ordinary shares owned

Mr and Mrs S 80
their 2 children 20.

Mr and Mrs S exercise their control of the company so that it makes a 3:1 rights issue at par (£1) when the shares are worth £2. Mr and Mrs S do not take up the offer but their children do. The resulting shareholdings are

Mr and Mrs S 80 (50%)
their 2 children 80 (50%).

There has been a shift in value from the shares held by Mr and Mrs S into the shares held by their children. TCGA92/S29 (2) can apply.