Changes in shareholdings: part of rights sold, balance taken up as shares
This situation is not straightforward and is best looked at by means of an example
Zoe’s estate includes a holding of 1,000 qualifying shares valued at £2,000. The shares are bequeathed to Clive, the sole executor. There is a rights offer on a 1 for 1 basis at £1 per share. Clive sells the right to accept 500 shares for £210 on the Stock Exchange. Clive accepts the remaining 500 shares, at a cost of £500, making a new holding of 1,500 shares.
Clive subsequently sells 1,000 shares for £1,300 and later the remaining 500 shares for £650, both sales being at the same price per share.
In accordance with the general approach for calculating the losses on the sales:
- the value on death has to be increased by £500 to reflect the cost of the new shares and
- the sale price of the shares sold have to be increased to reflect the sale proceeds of the rights, £210.
Under IHTA84/S183 (3) the value on death of the new holding of 1,500 shares is the original date of death value plus the cost of the new shares, i.e. £2,000 + £500 = £2,500.
The value on sale of the 1,000 shares sold is (under IHTA84/S181) £1,300 + (2/3 ´ £210) = £1,440. Applying the formula (IHTM34183) in IHTA84/S183 (5) the value on death of the investments sold is
Vs (H-S) ÷(Vs + Vr)
£1,440 (£2,500 - £0) ÷ (£1,440 + £650) = £1,722
There is a loss on sale of £1,772 - £1,440 = £282
The value on sale of the 500 shares subsequently sold is (under IHTA84/S181) £650 + (1/3 x £210) = £720. Again applying the formula in IHTA84/S183 (5), the value on death of the investments sold is
£720 (£,2,500 - £1,722) ÷ £720 = £778
There is a loss on sale of £778 - £720 = £58
If the application of the formula in this sort of case is challenged by the taxpayer, please refer to Technical (IHTM01081).