Capital Gains Tax on Share Reorganisations and Takeovers

When you hold shares in a company that's taken over, merges with another business, or reorganises its share structure, you might worry about a sudden Capital Gains Tax bill. The good news is that in many situations you won't face an immediate tax charge — though you do need to understand how these changes affect your tax position when you eventually sell.

How company takeovers work for Capital Gains Tax

When one company takes over another, it can offer you shares in the new company, cash, or a combination of both. Provided certain conditions are met — including that the reorganisation applies equally to all holders of your class of shares — you're not treated as having sold or disposed of your original shares for Capital Gains Tax purposes.

This means no immediate tax bill in many cases. However, the rules vary depending on what you receive.

When you receive shares only

If the takeover involves only shares (no cash), you don't pay Capital Gains Tax when you receive the new shares.

When you eventually sell or dispose of these new shares, they're treated as if you bought them at the same time and for the same cost as your original shares. Your gain is only calculated at that later point.

When you receive shares and cash

Many takeovers involve a mixture of shares and cash. Whether you pay Capital Gains Tax depends on how much cash you receive.

Small amounts of cash

You don't pay Capital Gains Tax if both of the following apply:

• You receive less than £3,000 or an amount less than 5% of the value of your shares (valued just before the takeover)
• The cash you receive is less than the cost of your original shares

When you later sell your new shares, your allowable cost will be the cost of the original shares minus the cash you received.

Special case: If the cash exceeds the cost of your original shares, you must calculate a capital gain on the difference between the cash received and the original cost. You must elect to do this in your tax return, which reduces the cost of your new shares to nil.

Example: You receive £2,000 cash and 2,000 new shares in a takeover. Your original shares cost £1,500. The cash is small but exceeds the original cost, so you elect to reduce your allowable costs to nil and pay tax on the excess of £500 (£2,000 - £1,500).

Larger amounts of cash

You may owe tax if you receive:

• More than £3,000 cash, or
• An amount equal to or more than 5% of the value of your shares in the original company (valued just before the takeover)

You must split the original cost of your shares proportionally between the cash and the new shares:

1. Work out the total value of cash and shares you receive

2. Calculate what percentage of that total the cash represents

3. Apply that same percentage to your original cost — this becomes the allowable cost for the cash

4. Subtract this allowable cost from the cash received to find your taxable gain

Example: You bought 800 shares in Company A for £1,000. Company B takes over Company A. You receive 1,600 shares in Company B worth £9,600 and £3,200 cash.

The total value you receive is £12,800 (£3,200 + £9,600). The cash represents 25% of this total (£3,200 ÷ £12,800). Therefore, 25% of your original £1,000 cost — which is £250 — becomes the allowable cost for the cash.

Your taxable gain is £2,950 (£3,200 cash minus £250 cost).

When you receive securities or loan notes

A takeover might involve receiving securities such as loan notes. The information you receive should explain whether these are Qualifying Corporate Bonds.

If they are Qualifying Corporate Bonds, you work out the gain as if you'd sold your original shares at their market value immediately before the takeover. However, this gain isn't chargeable to Capital Gains Tax until you sell or dispose of the bonds.

If the loan notes aren't Qualifying Corporate Bonds, they're treated the same way as shares issued in a takeover.

Share reorganisations, bonus issues, and rights issues

Companies may reorganise their shares in several ways:

• Bonus issues — new free shares are issued
• Rights issues — new shares are issued and you usually pay for them
• Share value reorganisation — for example, replacing ten 5p shares with one 50p share

When a company replaces your shares with new shares, you're not treated as having sold or disposed of them for Capital Gains Tax purposes.

Bonus and rights issues of the same class

When you later sell some of your shares, you must work out the cost correctly:

1. Combine the cost of all your shares of that class (the original cost plus any amount you paid for new shares in rights issues)

2. Work out what proportion of your total shareholding you're selling

3. Apply that same proportion to your total combined cost

Exception: If you buy more shares of the same class on the day of sale or in the next 30 days, you're treated as if you sold those newly purchased shares first, using their actual costs.

Example: You buy 800 shares in Company A for £1,000. Company A offers a rights issue of one new share (costing £1) for every two shares you hold. You accept and get 400 new shares, paying £400.

You now hold 1,200 shares costing £1,400 in total. If you sell 600 shares (and don't buy any more that day or in the next 30 days), you've sold 50% of your holding. The cost of the shares sold is £700 (50% of £1,400).

Bonus and rights issues of a different class

When you hold different classes of shares and sell shares of one class, the process is more complex:

1. Work out the value of each class of shares in relation to each other (using the value on the day the shares are first listed after reorganisation for listed shares, or the value at the time you sell for unlisted shares)

2. Calculate what proportion each class represents of the total value

3. Split your total original cost between the different classes using these same proportions

4. Work out the cost of the specific shares you're selling based on their class's allocated cost

Sources

• Capital Gains Tax: share reorganisation, takeover or merger

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.