ACCA ATX ^UK Syllabus A4. Corporation Tax - Bonus issues, rights issues, takeovers and reorganisations - Notes ^{4 / 5}

Bonus issues, rights issues, takeovers and reorganizations.

Once again, the treatment of bonus issues, rights issues, takeovers and reorganizations are exactly the same for companies and individuals. 

The only difference is that a company will index its cost, whereas an individual will get an annual exemption. 

For this reason, very similar illustrations and quizzes have been used so that the difference can be highlighted to you.

Bonus Issues

This is an issue of shares to existing shareholders in proportion to the number of shares owned at the date of the bonus issue.

• For example, if you owned 500 shares in a company and a 1:5 bonus issue was declared, you would receive (500/5) *1 = 100 bonus shares.

• These shares are deemed to be acquired at the same date and at the same cost as the original shares to which they relate. 

  They have no cost of their own. 

  Therefore, in your share pool, a bonus issue will only result in an increase in the number of shares, and no increase in the indexed cost of shares.

Illustration:

Mina Ltd purchased shares in C Co. 

The details of their purchases are below:

• May 2024 Purchased 3000 shares for £3,000

  Jan 2025 Purchased 1500 shares for £2,000

  March 2025 Bonus issue of 1:3 declared by the company.

• How many shares will Mina Ltd receive under the bonus issue? 

  What is the cost of these shares?

Solution:

Total shares in company = 4,500

• Bonus shares received = (4,500/3) * 1 = 1,500 shares

• New total of shares at March 2025 = 4,500+1,500 = 6,000 shares

• The bonus shares will have a Nil cost.

• When they are included in the share pool, the shares purchased previously will not be indexed to the bonus issue date. 

  The indexation of all of the shares will only happen once the next monetary purchase happens.

Rights Issues

A rights issue occurs where a company offers its existing shareholders the right to buy extra shares. 

Rights issues are similar to bonus issues in that the number of shares offered to each shareholder is generally in proportion to his or her existing shareholdering.

• The only difference is that a price is paid for these shares. 

  The price for the shares is normally lower than current market value, in order for the existing shareholders to be attracted to taking up the issue.

Illustration:

Jack Ltd purchased share in Jill Ltd. 

It had the following transactions in the company’s shares:

• Jul 2024 Purchased 6,000 shares for £15,000

  Sep 2024 Purchased 900 shares for £2,700

  Dec 2024 Took up 1:5 rights issue for £2.00 per share

• What will the rights issue cost Jack Ltd if they decide to subscribe to the issue fully?

Solution:

Total shares in company = 6,900

• Right shares received = (6,900/5) * 1 = 1,380 shares

• The rights shares will have a cost of £2.00*1,380 shares = £2,760

• Note carefully that these bonus issues and rights issue will follow the same matching rules for shares when they are disposed.

• The bonus issues will be included in the share pool at no cost and the rights issue shares will be included in the share pool at their respective cost. 

  The rights issue share purchase will cause indexation of the previous purchases until this date as this is a monetary purchase.

• Nothing changes with the matching rules.

Takeovers

Takeovers can either be for a share for share exchange, or a takeover can be for a cash exchange. 

We will deal with both of these situations separately via the use of illustrations.

• Takeovers (share for share exchange)

• If a takeover is for a share for share exchange, then no capital gains tax arises immediately.

  The market value of the new holding provided will be used to apportion our initial holding cost.  

  Then when we ultimately dispose of this new holding, we will use the original holding cost, and this will result in a capital gain assessable.

Illustration:

Jayna Ltd owned 2000 shares in A plc. 

Which cost them £2,000 in 2010, and A plc was being taken over by B plc in 2025

• Jayna Ltd was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and 500 preference shares with a market value of £1,000.

• Jayna Ltd takes up the offer.

  Will capital gains tax arise immediately?

  If not, when Jayna Ltd sells these new ordinary shares and new preference shares, what cost would be attributed to each?

Solution:

Total market value of new holding: £3,000+£1,000 = £4,000 

Total cost of original holding: £2,000

Cost attributed to ordinary shares:

Market value of ordinary shares/Total market value of new holding * original cost 

= £3,000/£4,000 * £2,000 = £1,500

Cost attributed to preference shares:

Market value of preference shares/Total market value of new holding * original cost 

= £1,000/£4,000 * £2,000 = £500

Jayna Ltd needs to use these costs as the acquisition cost when they decide to sell the shares in B plc.

(They cannot use the market value of the shares when they were given to them).

• Takeovers (share for cash exchange)

• If a takeover is for a share for cash exchange, capital gains tax will arise immediately for the proportion of cash given compared to the total market value of the new holding. 

  The market value of the new holding provided will be used to apportion our initial holding cost to be used.

Illustration:

Jayna Ltd owned 2000 shares in A plc. which cost them £2,000 in 2010, and A plc was being taken over by B plc in 2025.

• Jayna Ltd was offered by B. plc 1,500 ordinary shares with a market value of £3,000 and cash of £1,000.

• Jayna Ltd takes up the offer.

• Will capital gains tax arise immediately?

Solution:

Total market value of new holding: £3,000+£1,000 = £4,000 

Total cost of original holding: £2,000

Cost attributed to ordinary shares:

Market value of ordinary shares/Total market value of new holding * original cost 

= £3,000/£4,000 * £2,000 = £1,500

Cost attributed to cash given:

Cash received/Total market value of new holding * original cost 

= £1,000/£4,000 * £2,000 = £500

Jayna Ltd needs to use this £500 as the acquisition cost of the shares that it is deemed to have disposed of for the cash received.

Capital gains:

Disposal proceeds £1,000

Acquisition cost (£500)

Capital gain £500 (taxable immediately)

• No capital gain will arise on the share element, as described above.