Keep it simple Neil Da Costa

Shares for individuals simplified!

In this month’s article in the ‘Keep It Simple’ series, Neil Da Costa tackles a topic that examiners always say students struggle with – quoted shares for individuals

There are four main aspects regarding quoted shares for individuals: matching rules; rights and bonus issues; reorganisations; and takeovers.

Matching up shares sold with shares bought Shares sold are matched up with shares bought in the same company as follows: • Shares bought on the same day. • Shares bought in the next 30 days. • Shares bought before disposal. These shares are put in a pool.

Simple matching example: Jaz and Bigtech Plc During the lockdown, Jaz has been dealing in Bigtec Plc shares. On 1.1. 2022 he sold 1,000 Bigtec shares for £10,000. On 15.1 2022 he bought 400 Bigtec shares for £4,400 Before 1.1.2022 Jaz had bought 2,000 Bigtec shares for a total cost of £14,000 Compute Jaz’s capital gain on disposal before the annual exemption.

Solution to Jaz and Bigtech Plc Jaz has not bought any shares on the same day, so we first match up with the 400 shares bought in the next 30 days. This would result in a capital loss of £400 computed as follows (sale proceeds £4,000 less cost £4,400).

The remainder of 600 shares should be matched up with 2,000 shares from the share pool that cost £7 each. This would result in a capital gain of £1,800 (sale proceeds £6,000 less cost of £4,200).

The capital loss of £400 must be offset against the current gain of £1,800 to give a net gain of £1,400.

Rights and bonus issues Bonus shares are free shares while rights shares are shares purchased at a discount. Companies use rights issues to raise finance.

Simple rights and bonus issue example: Ling and Bigoil Plc Ling bought 2,000 Bigoil shares for £8,000. Bigoil had a 1:2 bonus issue a year later. Bigoil had a 1:3 rights issue for £3 a share after that. Compute the number of shares Ling has and the total cost.

Solution to Ling and Bigoil Plc Ling bought 2,000 Bigoil shares for £8,000. The bonus issue is 1:2 so Ling will get 1,000 bonus shares which will be free. She now has 3,000 shares and the cost is unchanged at £8,000. The rights issue is 1:3 rights at £3 a share so as Ling has 3,000 shares, she can buy 1,000 rights shares at a discounted price of £3,000. This means that the total number of shares is 4,000 and the cost is £11,000.

Reorganisations A company could have a capital reorganisation to enable it to manage dividend pay-outs or restructure its debt arrangements. If this is the case, then the original cost of the shares must be apportioned between the different elements of new capital based on the market value of new capital at the date of exchange.

Simple reorganisations example: Meera and Bigbank Plc Meera bought 1,000 Bigbank Plc shares for £5,000. Bigbank Plc had a capital reorganisation and Meera’s shares were exchanged for 2,000 preference shares with a market value of £3,000 and £1,000 2% loan stock with a market value of £3,000. Meera sold 1,000 preference shares for £4,000 two years later. Compute Meera’s capital gain on disposal before the annual exemption.

Solution to Meera and Bigbank Plc The first step is to apportion the original cost between the preference shares and the loan stock. As each element is worth 50%; 50% of the original cost of £5,000 is allocated to the preference shares which is £2,500. Meera has sold just 1,000 of the 2,000 preferences shares she received so the deemed cost of the 1,000 shares is £1,250. Meera ‘s capital gain on the preference shares is £2,750 (sale proceeds £4,000 less cost of £1,250).

Takeovers On a takeover, a shareholder can receive some cash as well as predator shares. The treatment is similar to a reorganisation and the original cost is apportioned based on the market value at the date of takeover. If the cash element is either more than 5% of consideration or more than £3,000 a capital gain will arise on the date of takeover.

Simple takeover example: Steve and Bigshop Plc Steve bought 1,000 Bigshop Plc shares for £10,000. Bigshop Plc was taken over by Megashop Plc and Steve received £5,000 cash and 1,000 Megashop Plc shares worth £10,000. Compute Steve ‘s capital gain on takeover.

Solution to Steve and Bigshop Plc The cash element is more than 5% of total consideration and more than £3,000 so a capital gain will arise on takeover.

The deemed cost allocated to cash will be one-third as the £5,000 cash is one-third of total consideration of £15,000. This means that the deemed cost allocated to cash will be £3,333. As a result, the capital gain arising due to cash on takeover is £1,667 (sale proceeds £5,000 less cost of £3,333). • Neil Da Costa is a Senior Tax Lecturer with Kaplan in London. He is the author of Advanced Tax Condensed, which summarises the entire syllabus using memory joggers