ACCA ATX UK Syllabus A2. Chargeable gains - Bonus issues, rights issues, takeovers and reorganisations - Notes 3 / 4
Bonus Issues
This is an issue of shares to existing shareholders in proportion to the number of shares owned.
For example, if you owned 500 shares and a 1:5 bonus issue was declared, you would receive (500/5) *1 = 100 bonus shares.
These shares are deemed to be acquired at the same date and at the same cost as the original shares to which they relate.
They have no cost of their own.
Therefore, in your share pool, a bonus issue will only result in an increase in the number of shares, and no increase in the cost of shares
Illustration:
Mina purchased shares in C Co.
The details of her purchases are below:
May 2024 Purchased 3000 shares for £3,000
Jan 2025 Purchased 1500 shares for £2,000
March 2025 Bonus issue of 1:3 declared by the company
How many shares will Mina receive under the bonus issue?
What is the cost of these shares?
Solution
Total shares in company = 4,500
New shares received = (4,500/3) * 1 = 1,500
The bonus shares will have a cost of £0
A rights issue
occurs where a company offers its existing shareholders the right to buy extra shares.
Rights issues are similar to bonus issues in that the number of shares offered to each shareholder is generally in proportion to his or her existing shareholdering.
The only difference is that a price is paid for these shares.
The price for the shares is normally lower than current market value, in order for the existing shareholders to be attracted to taking up the issue.
Illustration:
Jack is an employee in Jill Ltd.
He had the following transactions in the company’s shares:
Jul 2024 Purchased 6,000 shares for £15,000
Sep 2024 Purchased 900 shares for £2,700
Dec 2024 Took up 1:5 rights issue for £2.00 per share
What will the rights issue cost Jack if he decides to subscribe to the issue fully?
Solution:
Total shares in company = 6,900
New shares received = (6,900/5) * 1 = 1,380 shares
The rights shares will have a cost of £2.00 * 1,380 shares = £2,760
Bonus issues and rights issue and disposal
Note carefully that these bonus issues and rights issue will follow the same matching rules for shares when they are disposed.
The bonus issues will be included in the share pool at no cost and the rights issue shares will be included in the share pool at their respective cost.
Nothing changes with the matching rules.
Takeovers/Reorganisations
Takeovers or company reorganisations normally occur when a company is facing financial difficulty.
They attempt to change the structure and ownership of a company by having another company take over the individual company.
This will result in the identity and management changed of the individual company, in the hope of better decisions being made for the company in the future, resulting in a longer life for the company.
Takeovers/Reorganisations can either be for a share for share exchange, or a takeover can be for a cash exchange.
We will deal with both of these situations separately via the use of illustrations.
Takeovers (share for share exchange)
If a takeover is for a share for share exchange, then no capital gains tax arises immediately.
The market value of the new holding provided will be used to apportion our initial holding cost.
Then when we ultimately dispose of this new holding, we will use the original holding cost, and this will result in a capital gain assessable.
Illustration:
Jayna owned 2000 shares in A plc.
Which cost her £2,000 in 2014, and A plc was being taken over by B plc in 2025.
Jayna was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and 500 preference shares with a market value of £1,000.
Jayna takes up the offer.
Will capital gains tax arise immediately?
If not, when Jayna sells these new ordinary shares and new preference shares, what cost would be attributed to each?
Solution:
There will be no immediate charge to CGT as this is a ‘paper for paper’ exchange - there is no cash involved.
The original cost of the A Plc shares will just need to be apportioned between the new ordinary and preference B Plc shares.
Total market value of new holding: £3,000 + £1,000 = £4,000
Total cost of original holding: £2,000
Cost attributed to ordinary shares:
Market value of ordinary shares/Total market value of new holding * original cost
= £3,000/£4,000 * £2,000 = £1,500
Cost attributed to preference shares:
Market value of preference shares/Total market value of new holding * original cost
= £1,000/£4,000 * £2,000 = £500
Jayna needs to use this “attributed costs” as the acquisition cost when she decides to sell the shares in B. plc.
(She cannot use the market value of the shares when they were given to her).
Takeovers (share for cash exchange)
If a takeover is for a share for cash exchange, capital gains tax will arise immediately for the proportion of cash given compared to the total market value of the new holding.
The market value of the new holding provided will be used to apportion our initial holding cost to be used.
Illustration:
Jayna owned 2000 shares in A plc.
Which cost her £2,000 in 2014, and A plc which being taken over by B plc in 2025.
Jayna was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and cash of £1,000.
Jayna takes up the offer.
Will capital gains tax arise immediately?
Solution:
Yes - CGT will arise immediately because there is a cash element to the consideration which implies that some of the shares have been disposed of.
Total market value of new holding: £3,000 + £1,000 = £4,000
Total cost of original holding: £2,000
Cost attributed to ordinary shares:
Market value of ordinary shares/Total market value of new holding * original cost
= £3,000 / £4,000 * £2,000 = £1,500
Cost attributed to cash given:
Cash received/Total market value of new holding * original
= £1,000 / £4,000 * £2,000 = £500
Jayna needs to use this £500 as the acquisition cost of the shares disposed of for the cash received.
Capital gains:
Disposal proceeds £1,000
Acquisition cost (£500)
Capital gain £500
No capital gain will arise on the share element, as described above.