Chapter 13 Takeovers Flashcards
Takeovers - share for share exchanges and transfers involving cash
A takeover occurs when a company acquires more than 50% of the shares in another company. A company can take over another company by acquiring all of the shares in the target company. They can do this wholly in cash, by offering new shares in their company in exchange for the shares already owned or a mixture of cash plus new shares. If the shareholders accept this, they will be disposing of their shares, and CGT implications apply.
Share for share exchanges – also called paper for paper exchanges. Where old shares are swapped for new shares, there is no disposal for capital gains purposes, this applies automatically, and no claim is required. The new shares will have the same base cost and acquisition date as the original shares.
Takeovers Involving cash – a chargeable gain only arises if all or part of the consideration given to the vendor on a takeover involves cash. If old shares are exchanged for just cash, this gain is calculated in the normal way, using the share matching rules.
If old shares are exchanged for a mixture of new shares plus cash, this is a part disposal for CGT purposes. A gain only arises on the cash element. We calculate the allowable cost by:
A/(A+B) x original cost
(A is the cash received on the takeover and B is the market value of the new shares received)
different classes of shares and interaction with ER and IR
Different classes of shares – takeovers can involve vendors receiving different classes of shares in the new company. For example, ordinary and preference shares (no voting rights but receive preference for dividends). For CGT purposes it makes no difference whether the vendor receives ordinary shares or preference shares, they are both chargeable assets, so we calculate capital gains on sale in the normal way.
Interaction with Entrepreneur’s relief – since the introduction of ER, it is possible for a taxpayer to make an election to disapply the share-for-share rules on a takeover. This enables the taxpayer to make full use of ER in the tax year of the takeover if they wish. The election must be made by the anniversary of the 31 January following the year in which the takeover takes place (31 January 2022 for 19/20 tax year). The election will have the following effects:
• A gain arises, calculated as if the value of the new shares received was cash. This gain can then qualify for ER and
• The new shares have a base cost equal to their market value at the date of the takeover, this reduced the gain when the new shares are eventually sold
Interaction with Investors Relief – where the share for share rules apply, the new shares will be treated as being subscribed for at the same time as the old shares. When the combined ownership period of the shares is at least 3 years, a subsequent disposal of the new shares will qualify for Investors relief, provided other conditions are met. However, whilst the old shares must have been in an unlisted trading company when issued, relief will still be available if the new shares are in a listed company.
