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When company reorganisations take place with say Company X taking over Company Y. Mergers, Management Buy-Outs and Reverse take-overs are other events that fall into the reorganisation category.
The basic reorganisations such as Bonus Issues and Rights Issues can be handled by Capital Assets without any problem, it is where there is a complete exchange of shares and/or cash, that IRISPTP has the inability to cope with. There are certain workarounds that can be used to manipulate capital assets into handling these more complex reorganisations. These are outlined below.
The reorganisations we are going to discuss are typical of the majority of reorganisations that happen. It is where ‘Company Y’ takes over ‘Company X’ and issue ‘A’ amount of shares in the new company for ‘B’ amount of shares in the old company.
An extension to this reorganisation would be where ‘Company Y’ also gave a cash lump sum to the shareholder. In this scenario Company 'Y' offered the shareholders of Company 'X' shares plus a cash lump sum.
John is a shareholder of Company 'X'.
He acquired 3000 shares in May costing £9900.
In May he made a further acquisition of 3500 shares which cost him £16100.
His final acquisition was in May where he bought 2000 shares for a cost of £8800.
He then disposed of 1500 in April for £21000. John now holds 7000 shares.
In March
John accepted the Company 'Y' offer of 0.968 Company 'Y' shares for
every 1 Company 'X' share, plus £4 for each Company 'X' share held.
The Company 'Y' share price on the offer date was £8.75
Proportion_of_Shares_Received_-to-_Cash_Received.
For each Company 'X' share, john will receive 0.968 Company 'Y' shares plus £4 cash. Therefore for a shareholding of 7000 shares, John will receive:
Shares |
6776 Company 'Y' shares valued at £8.75 |
£59290 |
= A |
Cash |
£4 for each Company 'X' share |
£28000 |
= B |
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|
£87290 |
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Capital gains tax will be payable in respect of the cash element part of the offer. Since John did not dispose of any of his Company 'X' shares, the cash element must be put through ‘Other Capital Gains’ in Capital Assets in order to declare the gain to the HM Revenue & Customs. The taxable gain is calculated as follows:
Amount of cash received |
£28,000 |
Less Part of the base cost of his Company 'X' shares |
(£9,192) |
Gain chargeable to CGT |
£18,808 |
Question: ‘How did we come to a figure for the allocation of base cost against the cash received by John?’
The base cost of the new shares and cash will be allocated according to their relative proportion.
Lets say: |
A = |
Value of Company 'X' shares on date of reorganisation |
|
B = |
Amount of cash received in exchange for Company 'Y' shares |
Allocation of base cost: |
Cash |
£28,000 |
x Base cost (£28,659) = £9,192 |
£87,290 |
|
No tax is payable on this element of the offer until John sells these Company 'Y' shares. CGT may then be payable.
By now, you have worked out the chargeable elements of the reorganisation.
All that is left to do is to reorganise the new holding within IRIS Capital
Assets.
A new shareholding needs to be ADDED for John’s newly reorganised company, Company Y. Enter the date of acquiring the Company Y shares as 1st March , as you can use the base cost remaining after the proportion has been used in the calculation of ‘The Cash Element.’ The balance remaining of this cost is the new base cost of the Company Y shareholding.