Tax and your investments

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16. Takeovers

When you own shares in Company A, and Company A is taken over by Company B, you will usually find yourself swapping your shares in Company A for either:

• Cash
• Shares or loan stock in Company B
• Cash and shares or loan stock in Company B

1. Cash
   If you accept cash, the CGT implications are fairly straightforward - you have disposed of your shares and made a gain which is the difference between the sale proceeds and the base cost of the shares in Company A (after adjustment for indexation and/or taper relief).
2. Shares
   If you accept Company B's shares for the ones you had in Company A, you will not be deemed to have made a disposal provided that the acquiring company has obtained clearance from HMRC under the Taxation of Chargeable Gains Act 1992.

   The offer document should state whether clearance has been obtained, and if it has, you won't have to pay tax at the time of the share exchange. When you sell your shares in Company B, of course, there will be CGT to pay, and your base cost will be the cost of the original holding in Company A, as adjusted by indexation and/or taper relief.

3. Mixture of cash and shares
   If you take part cash and part Company B shares in exchange for your shares in Company A, you will have made a "part disposal".

   You will be liable for CGT on the cash element of the consideration, but will not pay CGT straight away on the loan stock element.

   Your gain on the cash element will be calculated by subtracting from the cash received a proportion of the base cost of your share in Company A. The proportion is worked out by this formula:

   Cash received / Cash received + Value of shares in Company B on first day of trading

   Example

   • Company A's shares cost you £5.00 each (after indexation)
   • Company B gave you £6 cash and one of its own shares in return for each share in Company A. On the day after the takeover, Company B's shares are 75p.
   • Your acquisition cost for the cash element is
     (6 / 6 + 0.75) x £5 = £4.45,
     and your gain therefore £1.55 (£6 - £4.45)
   • Your acquisition cost for the shares in Company B will be deemed to be
     (0.75 / 6 + 0.75) x £5 = £0.55.
     This is the amount you will have as your base cost when you sell Company B's shares, but you won't have to pay CGT til then.
4. Mixture of shares and loan stock

   If you exchange your shares in Company A for shares and loan stock in Company B, you will not have made a chargeable gain. But you will need to work out the acquisition costs of the two types of securities that you now have in Company B just as you did above.

   The calculation is identical: you have to work out how the base cost of your shares in Company A should be divided between the different parts of the package from Company B.

   In the example above, Company A's shares cost you £5 each. Let's assume that Company B offers you 4 of its shares and £2 loan stock in return for 5 shares in Company A. On the first day of trading Company B's shares are 75p and its loan stock at 105p. The total value of Company B's offer is therefore (4 x £0.75) + £2.10 = £5.10

   • The proportion of the 5.10 attributable to Company B's shares is 3.00/5.10 which is 0.58824
   • The proportion of the 5.10 attributable to loan stock is 2.10/5.10 which is 0.41176

   The original holding in Company A cost £5 per share, so the acquisition costs of the securities you now own in Company B are:

   • the shares: cost per share is 0.58824 x £5 = £2.94
   • the loan stock - cost per unit of £1 is 0.41176 x £5 = £2.06

1. Keeping it legal 2. How HMRC treats your investment income 3. Keeping records 4. The basis of dividend income 5. Dividend income 6. Interest income 7. Interest on Treasury Stock 8. Capital gains tax basics 9. Base cost 10. Indexation 11. Taper relief 12. Indexation and taper relief - together! 13. Date of acquisition 14. Disposal proceeds 15. Disposal of a holding with a history 16. Takeovers 17. Bonus/scrip issues 18. Share splits 19. Buybacks 20. Rights issues 21. Share options 22. Beneficiaries and minors 23. Calculating your CGT liability 24. Using your annual CGT exemption 25. Transfers between spouses 26. ISAs 27. Delaying capital gains 28. Other tips to reduce CGT liability 29. Conclusion