Sale of rights

Introduction

Where a shareholder does not take up his right to new shares but sells those rights to a third party, the proceeds are treated as a capital distribution and constitutes a part disposal of shares [TCGA 92 s.122].

However the inspector may make a direction under [TCGA 92 s.122 (2)] if he or she is satisfied that the distribution is small (5% or less) compared with the value of the shareholding or they amount to £3000 or less.

The effect of this direction is that the distribution is not treated as a disposal but the amount received is deducted from the recipient’s (shareholder) allowable expenditure on the shares.

It is possible that a recipient may want to have a small distribution treated as a disposal and would prefer the Inspector not to make the direction under [TCGA 92 s.122 (2)]. This could be advantageous if for example any gain would be covered by the annual exemption.

The Revenue have stated that in such cases they will not insist on the application of [TCGA 92 s.122 (2)] if the recipient (shareholder) would prefer to have the distribution treated as a disposal.

Below is such an example and how to deal with it in IRIS Capital Assets.

Example

Mr Jones had a holding of 75,000 shares, with a MV @ 31/03/82 of £16776. In December there was a Rights Issue of 5 shares for every 24 held. Mr Jones decided not to take up his rights and disposed of them instead for £37292. The ex-right’s value was £6.18 per share, making the ex-rights value of the holding £463,500 (£6.18 x 75,000).

As IRIS cannot cope with Sale of Rights at the moment, a manual calculation needs to be done in order to ascertain the chargeable gain on the sale of rights. This gain would then need to be entered through the ‘Other Capital Gains’ section of capital assets. You would then have to amend the original holdings base cost on in IRIS. An example of such a calculation is as follows:

The allowable cost of the shares is then reduced to £15527 (£16776-£1249)