CG57855 - Capital distributions: rights issue: introduction

TCGA92/S123

When a company declares a rights issue, see CG50292, it will usually send its shareholders a provisional letter of allotment for the new shares. This means the new shares have been allocated to the shareholders. If the shareholders want to take up all or part of the rights issue they will accept the allotment by paying for the shares. Because rights issues are often made at a discount to the prevailing market price the provisional letter of allotment is valuable. The shareholders can renounce or sell the letter of allotment to another person who wants to subscribe for the shares. This process is sometimes called the sale of rights nil paid. TCGA92/S123 provides that the disposal of a provisional letter of allotment shall be treated as a capital distribution. Section 123 also applies to provisional letters of allotment to acquire debentures.

 

Capital distributions can also arise on rights and bonus issues in two other ways.
 

  • The terms of a rights or bonus issue may give a shareholder the right to a fractional number of shares. For example, a bonus issue of one share for every three held would give the holder of 100 shares the right to receive 33 1/3 shares. The company will usually sell these fractional entitlements on the shareholder’s behalf and distribute the proceeds to them. It is quite likely that these payments will be small capital distributions.

 

  • If shareholders allow their rights to lapse the company will often sell their entitlements and distribute the proceeds to them. The rights will lapse if the shareholder does not accept the letter of allotment or sell their rights nil paid.

 

 

Different class of share

A company may make a rights issue of a single class of share in respect of different classes. For example, it may make a rights issue of ordinary shares in respect of ordinary shares and ‘A’ ordinary shares. If a taxpayer holds both classes of share any rights sold should be apportioned rateably between the two holdings.
 

Position of purchaser

Anybody who buys rights nil paid is only likely to do so if they want to subscribe for the new shares. The cost of acquiring the rights is added to the cost of acquiring shares, TCGA92/S43.