Guidance

HS285 Share reorganisations, company takeovers and Capital Gains Tax (2024)

Updated 6 April 2024

The following guidance includes calculations.

This helpsheet is about share reorganisations that involve shares held by individuals, personal representatives and trustees. It explains the basic rules that apply to disposals made during the tax year and will help you fill in the Capital Gains Tax summary pages of your tax return.

Read this in conjunction with Helpsheet 284 Shares and Capital Gains Tax, which explains the basic rules applying to the acquisition and disposal of shares. Both helpsheets assume the capital gain or loss will be calculated using the actual costs of acquisition and the actual disposal proceeds. There are situations in which market value must be substituted for actual cost or disposal proceeds. This helpsheet explains only the basic rules, as they apply in simple cases. If you’re in any doubt about your circumstances, you should ask your tax adviser. HMRC will also be pleased to help. The Capital Gains Tax Manual explains the rules in more detail.

The general rules described in this helpsheet may not apply to any shares which you acquired under the Enterprise Investment Scheme (EIS), or to shares in a Venture Capital Trust (VCT). For general information on EIS and VCT shares, see Helpsheet 297 Enterprise Investment Scheme and Capital Gains Tax and Helpsheet 298 Venture Capital Trusts and Capital Gains Tax.

Ask HMRC or your tax adviser if you need detailed information on the rules for EIS or VCT shares.

What a share reorganisation is

A share reorganisation is a general term used to describe certain transactions in which:

• new shares are issued to the shareholders in a company
• the rights attaching to shares are altered
• a company’s share capital is reduced

The most common share reorganisation transactions are bonus issues and rights issues. In both cases, new shares are allotted to some or all of the existing shareholders in proportion to their shareholdings. In a rights issue the allotment is provisional until the shareholder accepts they’ll pay for the shares. There are other transactions, such as open offers, which may be treated as share reorganisations where new shares are issued to existing shareholders in proportion to their shareholdings. Other examples, not involving an issue of shares, include capital reorganisations and an alteration of the rights attached to shares.

Example 1

Examples of share reorganisations which do not involve an issue of shares are:

• five 10 pence ordinary shares may be consolidated into one 50 pence ordinary share
• ordinary shares with no voting rights that may be given the right to vote

Information available about share reorganisations

This helpsheet is concerned primarily with share reorganisations involving listed companies. If a listed company makes a share reorganisation it’ll almost always issue a circular or prospectus to its shareholders. This will include the company’s explanation of the tax treatment. Often it’ll be followed up with more detailed advice. For example, the counterfoil attached to a new share certificate may give details of the allowable cost for a stock dividend. You should keep this information as it’ll help you complete your tax return.

How share reorganisations are dealt with for Capital Gains Tax purposes

The basic Capital Gains Tax (CGT) rules that apply to share reorganisations are:

• the issue of any new shares is not treated as an acquisition
• the loss or alteration of any old shares is not treated as a disposal

Because a share reorganisation is not treated as an acquisition, any new shares of the same class that you receive are added to the holding for which they were issued.

These rules do not apply to Employee Shareholder Shares issued to you as an employee working under an employee shareholder employment contract. Guidance on the CGT treatment of Employee Shareholder shares sets out the CGT treatment of Employee Shareholder Shares.

Example 2

You own 1,000 shares in JKL plc. JKL plc makes a bonus issue of 1 new share for every 2 shares you hold. You receive another 500 shares and now have 1,500 shares in JKL plc. If you make a disposal of only some of those shares you use the share identification rules as described in Helpsheet 284 Shares and Capital Gains Tax to establish the cost of the shares you’ve sold.

Because you’re not treated as acquiring the new shares, the same day rule and the bed and breakfasting rule (see the section ‘How to identify the shares disposed of’ in Helpsheet 284 Shares and Capital Gains Tax) do not apply.

Example 3

On 6 May 2013 you buy 1,100 shares in LMN plc.

On 4 February 2024 you sell 200 shares reducing your holding to 900 shares.

On 3 March 2024 LMN plc makes a bonus issue of 1 share for every 3 shares held and you receive another 300 shares.

The bonus issue is a share reorganisation so your additional 300 shares are not treated as acquired on 3 March 2024 but on 6 May 2013.

Therefore the 200 shares sold on 4 February 2024 are not matched with 200 of the new shares under the 30-day bed and breakfasting rule but are with 200 of the original 1,100 shares that you held on that day.

The additional 300 shares and the 900 shares remaining, after the sale of the 200 shares, comprise your new holding of 1,200 shares from 3 March 2024.

There are special rules that deal with any amounts you have to pay on a share reorganisation, such as when you take up a rights issue. These are explained in this helpsheet. There are also special rules which apply to the taxation of any amounts you receive other than the issue of new shares. These are explained in the section on takeovers in this helpsheet.

If the shares you acquire on the reorganisation are not of the same class, they’ll form a separate holding. The cost of the original shares is apportioned (see the section share reorganisations involving different classes of shares).

If the share reorganisation is a bonus issue there’s no allowable expenditure to add to the actual cost of the original shares. If the share reorganisation is a rights issue, you add the cost of the further shares acquired in the rights issue to the cost of the original shares.

Example 4

In April 2014 you buy 1,000 shares in OPQ plc for £7,000.

On 26 May 2015 OPQ plc declares a 1 for 5 rights issue at a price of £9 per share.

You take up your full entitlement to 200 shares and pay £1,800 for them.

On 2 June 2023 you sell 300 shares for £12 per share, receiving £3,600 in total.

Following the steps in the paragraph headed ‘How to work out the gain for shares in a section 104 holding’, Helpsheet 284 Shares and Capital Gains Tax, you work out the gains as follows:

Step	Number of shares	Pool of actual cost
Step 1 April 2014 The pool is formed	1,000	£7,000
Step 2 May 2015 Add the cost of the 200 new shares to the pooled cost (200 × £9 = £1,800)	1,200	£8,800
Step 3 June 2023 Calculate the gain or loss First, calculate the allowable cost by multiplying the pool of cost by the number of shares sold then divide by total number of shares in the pool (£8,800 × 300 ÷ 1,200)	—	£2,200
Second, calculate the gain or loss (chargeable gain ) Disposal proceeds Minus allowable cost (£3,600 − £2,200)	—	£1,400
Third, adjust the holding of shares remaining Brought forward minus shares sold Carried forward	900	£6,600

Share reorganisations involving different classes of shares

The shares issued on a share reorganisation may be of a different class from the shares you already own. Because the shares are of different classes you cannot identify the allowable cost of the shares using the number of shares disposed of. Instead, you identify the allowable cost from the respective values of the shares using the formula:

Cost × value of shares disposed of ÷

value of shares disposed of + value of shares still held

The time at which you determine the cost of the different classes of share depends on whether or not any of the shares are listed on the Daily Official List of the London Stock Exchange, or any other recognised stock exchange, within 3 months of the reorganisation taking effect.

Listed shares

For listed shares you value the different classes of share on the first day when values are listed for the shares in the reorganisation.

Example 5

In May 2015 you buy 1,000 £1 ordinary shares in FGH plc, a listed company, for £1,800.

In March 2023 FGH plc makes a rights issue of one £1 ‘A’ ordinary share for every 4 £1 ordinary shares held at a price of £2.50 per share. You take up your full entitlement of 250 £1 ‘A’ ordinary shares at a cost of £625.

On the day after the share reorganisation, the £1 ordinary shares had a value of £8 per share, and the £1 ‘A’ ordinary shares a value of £2.60 per share.

If you sell the ordinary or the ‘A’ ordinary shares you split the cost between the different classes of share as follows.

Step 1

Calculate the cost up to and including the share reorganisation

Month	Number of ordinary shares	Number of ‘A’ ordinary shares	Pool of actual cost
May 2015	1,000	—	£1,800
March 2023 — rights issue	—	250	£625
Holding at March 2023	1,000	250	£2,425

Step 2

Split the cost of the 2 pools of expenditure. The amount allocated to the £1 ordinary shares is given by the formula:

Value £1 ordinary shares divided by Value £1 ordinary shares + Value £1 ‘A’ ordinary shares

1,000 × £8 ÷ (1,000 × £8) + (250 × £2.60)

= 8,000 ÷ 8,650

Pool of actual cost £2,425 × 8,000 divided by 8,650 = £2,243

At March 2021 you have a holding of £1 ordinary shares:

Number of shares = 1,000

Pool of actual cost = £2,243

and a holding of ‘A’ ordinary shares

Number of shares = 250

Pool of actual cost £182

Shares that are not listed

For unlisted shares you wait until you dispose of some of the shares before splitting the cost. The values you use in the formula are the values of the shares at the time of the disposal.

If the company in Example 1 hadn’t been a listed company then you would split the cost of the shares in the same way but using the value of the shares when the disposal that caused the calculation to be required was made.

For example, if you sell some or all of your £1 ordinary shares in September 2023 you would allocate the actual cost of £2,425 between the holding of £1 ordinary shares and A ordinary shares based on the market values of those shares on that date. If you only sell some of the £1 ordinary shares then you need to allocate a proportion of the cost of the holding of these to those sold. Strictly, that should be based on market value but you can simply use the proportion of the £1 ordinary shares sold.

Stock dividends

In a stock dividend, the company paying a dividend gives its shareholders the option of taking the dividend in the form of new shares rather than cash. It’s a form of bonus issue as the shareholders do not pay for the new shares. Shareholders who take shares are taxable on the dividend. They’re treated as having received an amount called ‘the appropriate amount in cash’, which attracts Income Tax.

For CGT purposes, shareholders are treated as though they paid the appropriate amount in cash for the new shares. In other words, the appropriate amount in cash is the allowable expenditure on the new shares. If a stock dividend is paid by a listed company, that company will usually explain the tax treatment and tell you the value of the appropriate amount in cash.

This explanation may not apply to stock dividends received by trustees, so ask HMRC or your tax adviser for details.

Demergers

A demerger in which a company distributes shares in a subsidiary to its shareholders may be treated as a share reorganisation. Because the shareholder will then own shares in the original company and the subsidiary, this is a share reorganisation involving different classes of share. It’s therefore necessary to apportion the allowable cost of the shares using the rules explained in the section share reorganisations involving different classes of shares. A listed company making a demerger will usually tell its shareholders whether the demerger is a share reorganisation.

Takeovers

When a company takes over another it may issue its own shares and securities in payment or part payment for the shares it’s buying. Under certain conditions this is treated as a share reorganisation. If the takeover is by a listed company, the information you receive about the takeover will usually say whether these conditions are met.

The payment can consist of a mixture of cash, shares and securities. The treatment of these different elements is described in this helpsheet.

All shares

If the company making the takeover only issues shares, you’re treated as though you acquire the new shares at the same time and at the same price as the old shares. You may already own shares in the company making the takeover. If you do, the new shares and the existing holding will be merged.

Example 6

You have the following holdings of shares:

Company name		Shares	Cost
KNO Ltd		5,000	£6,000
RST Ltd		2,000	£8,000

RST Ltd takes over KNO Ltd and issues 5 RST Ltd shares for every 1 KNO Ltd share held. You get 25,000 RST Ltd shares in exchange for your KNO Ltd shares. You’re treated as having acquired these shares at the same cost (or 31 March 1982 value) as the KNO Ltd shares they replaced.

The holding of RST Ltd shares now becomes:

Company name	Shares	Cost
RST Ltd	27,000	£14,000

Shares and cash

If the company making the takeover gives you cash and shares, you may have to pay CGT on the cash you receive. If the amount of cash you receive is small compared with the value of your shares in the original company immediately before the takeover, there may be no immediate liability. In that case, if the allowable cost of your original shares is more than the cash received, you simply reduce the cost by the amount of the cash received and use the reduced amount of cost to work out your gain or loss on a later disposal of the new shares you received in the takeover. If the cash received is more than the allowable cost, you reduce the cost to nil for later disposals of the new shares and have an immediate gain equal to the excess of the cash over the cost.

HMRC accept that a cash receipt on a takeover is small if either it’s less than £3,000 in total, or it is not more than 5% of the value of the shares in the original company immediately before the takeover. If the cash you receive is not small, you’ll need to work out your gain or loss on the cash received by apportioning the allowable cost of the shares in the original company between the cash received and the shares received.

You do this by reference to the value of what you receive. The formula is:

Value of cash received ÷
Value of cash received + Value of shares received

Example 7

You have a holding of 20,000 shares in CDE Ltd that cost £3 each.

On 17 March 2024 CDE Ltd is taken over by WXY Ltd.

WXY Ltd pays £4 in cash and issues 2 of its own shares for each share in CDE Ltd, so you received £80,000 in cash and 40,000 WXY Ltd shares.

On 17 March 2024 each WXY Ltd share is worth £6.

The holding of CDE Ltd shares was:

Number of shares	Pool of actual cost
20,000	£60,000

The receipt of the cash on the takeover is treated as involving a disposal of an interest in the CDE Ltd shares.

The cost of the CDE Ltd shares is allocated between the cash received and the shares in WXY Ltd after the takeover by reference to the value of the amount received compared to the value of WXY Ltd shares as follows:

Value of cash received divided by Value of cash and shares received

20,000 × £4 ÷ [(20,000 x £4) + (40,000 × £6)]

= £80,000 ÷ £320,000

= 1 ÷ 4

Allowable cost of CDE Ltd shares allocated to cash received

£60,000 × 1 ÷ 4

= £15,000

CGT calculation:

Disposal proceeds £80,000

Minus cost £15,000

Chargeable gain £65,000

You now have a holding of 40,000 WXY Ltd shares.

Number of shares	Pool of actual cost
40,000	£45,000

(£60,000 minus £15,000)

Securities

The company making the takeover may issue securities such as loan notes. This is sometimes described as a loan note alternative to the cash offer. The tax treatment depends on whether the securities are Qualifying Corporate Bonds (QCBs). The information given to you at the time of the takeover should say whether the securities are QCBs. If the securities are not QCBs you follow the rules described in the section all shares.

If the securities are QCBs the rules that you calculate the gain that would have arisen if the shares in the company being taken over were sold at their market value immediately before the takeover. That gain becomes chargeable as and when the QCBs are disposed of. Any gain or loss on the disposal of the QCBs themselves is not taken into account for CGT purposes.

Example 8

You own 1,000 shares in JLM Ltd.

JLM Ltd is taken over by NPR Ltd which issues securities worth £5 for every share in JLM Ltd you hold. The securities are QCBs.

Your holding of JLM Ltd shares was worth £5,000 immediately before the takeover.

If the cost of these shares was £3,500 this would give a notional gain of £1,500 immediately before the takeover.

If you dispose of half the securities, that will release a gain of £750.

If you receive cash as well as QCBs on a takeover you may have to pay CGT on the cash you receive, unless the amount of cash is small. See the section shares and cash for the meaning of small. If the cash amount is small, it’s ignored and you follow the rules described in the paragraph to calculate the gain that becomes chargeable when the QCBs are disposed of. If the cash is not small you still calculate the gain as described, but a proportionate part of the gain is chargeable at the time of the takeover.

For example, if you received £25,000 in cash and QCBs worth £75,000, one-quarter of the gain would be chargeable at the time of the takeover and three-quarters of the gain would be chargeable when you disposed of the QCBs.

Cash, shares and securities

The company making the takeover may offer a combination of cash, shares and securities. You’ll have to apportion the allowable cost of the shares in the company being taken over between the different elements of the consideration received. As shown in the examples, you do this by reference to the values of what is given or received.

Earn-outs

Some company takeovers may include an earn-out right, where the amount of the consideration to be paid depends on, for example, the future profits of the company. Because the amount cannot be calculated at the time of the takeover, the value of the earn-out right itself represents disposal proceeds. However, if you receive an earn-out right which can be satisfied only by an issue of shares or debentures, and the right was conferred on or after 10 April 2003, the right may be treated as if it were itself a security, but not a QCB. Then the rules for company takeovers described in the section all shares, apply to the receipt of the earn-out right. Those rules will also apply when you actually receive any shares or debentures under the terms of the earn-out.

The rules for earn-outs can be a complex matter. If you receive an earn-out right you are advised to consult your professional adviser or the Capital Gains Tax Manual.

If you do not want the company takeover rules to apply to an earn-out right, you may elect for it not to be treated as a security. The time limit for an election is 12 months from 31 January in the tax year following that in which the right was conferred. So if the right was conferred in tax year 2023 to 2024 the time limit is 31 January 2026.

If you want to make an election for a right conferred in tax year 2023 to 2024, you should use code ‘OTC’ in either box 28 or box 36 (as appropriate) on page CG 2 of the Capital Gains Tax summary pages If there are other transactions that are included in the same section of the Capital Gains Tax summary and more than one code could apply to boxes 28 or 36, then you should use code ‘MUL’ instead. You should say in the any other information box, box 54 or in your supporting computation that an election is being made.

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