Rights Issues and Capital Gains Tax

Judesman

This concerns the Galliford Try rights issue. The prospectus states that a sale of rights realising less than £3000 may be ignored for Capital Gains Tax purposes. The shares are now trading ex-rights so I could sell my rights and make a small profit.

But, what is the position if I also want to sell my base holding which is now trading at the ex-rights price. Could someone please explain how these two transanctions interact for Capital Gains Tax puposes. If I sell my base holding I am going to crystalize a loss on my GT shares. Any help appreciated.

bowlhead99

Basically if the rights sold is 'small' it doesn't count as a disposal for CGT and you don't have to do a gains calculation at that point. But it's treated like you have 'taken money back out' of the original shares you'd put your money into.

So when you sell the shares later, you will need to deduct the value you already pulled out of them, from the 'base cost' of those shares (when comparing sales proceeds to base cost to figure the gain).

For example:
Buy shares at 95p. Shares increase in value to 98p. Opportunity to sell unwanted rights for 5p is taken up and the shares drop to 93p ex-rights.

When you do the rights sale and get your 5p, you don't have to do a CGT calc. You just pocket the 5p free and clear from any taxes. However, you're then left with the original share which cost you 95p and could only now be sold for 93p, which looks on the face of it like you made a loss.

But if you sell that share for 93p and claim you paid 95p for it and made a CGT loss of 2p, you have basically scammed the tax man because you've extracted 98p of total value from something that only cost 95p, yet you're claiming losses.

So all that happens is that when you sell the share for 93p, you compare that sales price to your 'cost' of the share, but you don't use the real original cost of 95p, you use 90p instead: the 95p cost less the rights money you extracted. So you do 93 minus (95 less 5) = 93 minus 90 and have a 3p profit on the sale of the share.

Couple of paragraphs on gov.uk website here, though note that the gov uk website usually errs on the side of simplicity so you could consult hundreds of pages of tax law if you want a fuller answer... https://www.gov.uk/guidance/capital-gains-tax-share-reorganisation-takeover-or-merger#rights-that-you-give-up-or-sell-on

Judesman

Thank you very much bowlhead for your comprehensive reply, very much appreciated. I now just have to make a decision!