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HMRC internal manual

Inheritance Tax Manual

HM Revenue & Customs
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FACET procedures: rights issues

A rights issue is similar to a bonus issue in that shares are offered to existing shareholders in proportion to their existing shareholding. But in a rights issue these new shares are not free. The shareholder has to pay for them, although at less than full market value.

If the ‘appropriate person’ (IHTM34161) either sell the rights or receive a payment for lapsed rights, you should follow the instructions for capital payments (IHTM34100).

If the executors take up the rights issue, you should check that

  • the price of the additional shares have been correctly added to the value of the date of death holding, and
  • the sale proceeds include the sale proceeds of the rights shares.If the date of death value or the sale proceeds need to be adjusted you should amend form IHT 35, marking the form ‘for IHT 35 purposes only’ if the additional shares were not included in the value of the date of death holding. You should also recalculate the loss.

There are examples of how the loss is calculated

  • if the rights issue is taken up and sold (IHTM34189), and
  • if, unusually, the appropriate person sells part of the rights and takes up the balance (IHTM34192) of the shares. If there is any doubt as to whether the executor purchased, or sold the rights or accepted payment for lapsed rights, you should ask the caseworker to check what option was taken up.

There are special rules that prevent the loss on the sale exceeding the value of the original holding at the date of death. This situation may arise when the appropriate person makes a payment because of a rights issue. You will therefore need to check that the loss on sale when a call is included does not exceed the original value of the holding. If it does you should refer to the instructions (IHTM34106) on limitations of loss on sale of shares relief to see what adjustments you will need to make.