Tax and your investments

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17. Bonus/scrip issues

The reason for scrip issues is all to do with shareholder psychology. When a share price gets above the £10 mark, it is generally reckoned to put off small investors. For whatever reason, people prefer to buy 1,000 shares trading at £1 than 100 shares trading at £10.

In order to improve marketability, companies make a scrip issue. They issue the owner of, for instance, 100 shares with 900 new shares, free of charge. He now owns 1,000 shares. The market acknowledges the increased number of shares by marking the share price of each downwards on a pro rata basis.

Each new share will earn one tenth of the dividend of the old shares, but overall the shareholder will get the same income as before. There has been no dilution of his holding in real terms. In effect, the cake has been cut into smaller bits, but the amount on his plate is the same.

From a capital gains point of view the effect of a scrip is to dilute the base cost of the shares. The "free" shares are apportioned against existing shares on a pro rata basis.

Example

You have 3000 shares acquired in three stages

1. 1000 bought 10th October 1980 - value on 31.3.82 was £1, so total cost is £1,000
2. 1000 bought 15th June 1986 for £1.50, so total cost is £1,500
3. 1000 acquired free on 12th March 1992 by virtue of 2-for-1 scrip issue

For CGT purposes the 1000 free shares are split between the two original parcels, five hundred going to each. So you now have:

• 1500 shares acquired prior to 31st March 1982. Total base cost is £1,000
• Pool Two: 1500 shares acquired on 15th June 1986. Total base cost is £1,500

Notice that although more shares sit in each pool, the total base cost of each Pool has not risen. It is still £1,000 for the first pool and £1,500 for the second.

When you sell the shares, you will be deemed to sell from the second pool first and only from the first pool when you have exhausted the second. Indexation and taper relief will apply to each pool differently, according to their acquisition dates.

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