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HMRC internal manual

Employment Related Securities Manual

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HM Revenue & Customs
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Employment-related securities and options: rights issues

The principles that apply to replacement or additional securities also apply to rights issues. A rights issue in respect of employment-related securities will be an employment-related securities option, potentially charged under Chapter 5 (see ERSM110000). However a gain will rarely arise because the rights issue will reduce the value of the existing holding.

In practice, problems are unlikely to arise where employees hold quoted shares. Where the shares are unquoted, an examination of the circumstances should quickly determine whether value has been transferred from one group of shareholders to the employees. We are unlikely to be interested in whether, for example, a couple of minority shareholders have failed either to take up or to sell their rights.

Relief for such a reduction in value is provided by subsection (3) of ITEPA03/S480. So, if there is a single class of shares and a one-for-one rights issue at a discount, each existing share will reduce in value.

Example 1: full relief for rights issue in quoted company

For example, assume the share price was originally £1, there were 1,000 issued shares, and the rights issue was priced at 50p; then:

  Shares Value of company MV Share
       
Original 1,000 @ £1 £1,000 £1
Rights Issue 1,000 @ 50p £1,500 75p

So, if the employee owned a share worth £1 and paid 50p for a second share, he/she would have paid 50p for a share worth 75p, a 25p gain. Against this, he/she could claim a reduction in value of the original share, reduced from £1 to 75p, which is a 25p loss. Net result is no gain and no loss.

If the employee sold his/her right for 25p (75p share value less 50p price) he/she would make a 25p gain on disposal of a securities option. Against this he/she could claim a reduction in value of the original share, reduced from £1 to 75p, which is a 25p loss. Net result is no gain and no loss.

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Example 2: partial relief for rights issue

However, if, say, the employees have A shares, whereas everyone else has ordinary shares and there is a rights issue at a discount just to the A shareholders, then value will have been transferred from the ordinary shareholders to the employees and a charge to tax may arise.

Restricted securities

The interaction of the restricted securities rules (see ERSM30000) and the securities options rules (see ERSM110000) where rights issues are made to holders of restricted securities can be complex and advice may be sought from ESSU if particular difficulties arise.