CAT / FIA FTX Syllabus D. Capital Gains Tax - Bonus issues and rights issues - Notes ^{2 / 3}

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 2023 Purchased 3000 shares for £3,000

  Jan 2024          Purchased 1500 shares for £2,000

  March 2024 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 shareholder.

• 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 2023 Purchased 6,000 shares for £15,000

  Sep 2023  Purchased 900 shares for £2,700

  Dec 2023 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.