Tax and your investments

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20. Rights issues

Companies have rights issues when they want to raise more money on the stock market. Rather than take on corporate borrowings, they offer to sell new shares at a stated price, usually below their current price to make them attractive.

Typically, a rights issue is expressed as "one for two" or "one for six". What this means is that for every two (or six) shares you already own, the company will offer you the right to buy one more at the special price.

From a taxation point of view, the shares acquired following a rights issue are deemed to have been acquired at the same time as the shares which gave rise to the right. If your original shares were acquired in different tranches, the new shares are apportioned pro rata to the tranches.

Example

Imagine that you have built up a holding in Superball plc as follows:

• 1000 shares bought 10th October 1980. Value on 31.3.82 was £1, so total cost is £1,000
• 1000 shares bought 15th June 1986 for £1.50, so total cost is £1,500

Then, in June 1997, the company has a 1 for 2 rights issue at £2.00 per share, and you decide to exercise your rights by buying another 1000 shares. For the purposes of establishing an acquisition date, those 1000 shares are split between the two earlier purchases, so that you now have two pools:

Example

• 1500 shares acquired 10th October 1980 costing £2,000 (£1,000 original cost + 500 x £2)
• 1500 shares acquired 15th June 1986 costing £2,500 (£1,500 original cost + 500 x £2)

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