Shares Flashcards
Issues with share disposals Bonus issues and rights issues Tax planning
What are the matching rules for shares?
When selling shares, the following matching rules apply for calculating capital gains tax:
- Shares acquired on the same day are matched first.
- Shares acquired in the next 30 days are matched next, using the earliest acquisitions first.
- The remaining shares are matched using the share pool, which includes all other shares acquired before the disposal.
The matching rules ensure that gains or losses on shares are calculated in a specific order to prevent manipulation of acquisition timing for tax benefits.
How do you calculate the cost of shares from a share pool upon disposal?
To calculate the portion of the share pool disposed of, use this formula:
Cost of disposal = (Total cost of shares in the pool) * (Number of shares disposed / Total number of shares in the pool).
The share pool method averages the cost of all shares held before disposal, providing a fair way to calculate gains when shares are sold, especially when multiple acquisitions have been made over time.
What are bonus issues of shares?
A bonus issue occurs when a company gives free additional shares to existing shareholders, proportional to their current holdings. For example, if you own 1,000 shares and the company declares a 1:2 bonus issue, you would receive 500 new shares for free. These bonus shares carry no acquisition cost.
Bonus shares increase the number of shares a person owns without increasing their total investment cost, which reduces the overall cost per share. However, the value of each share typically decreases due to the increased number of shares outstanding.
What is a rights issue of shares?
A rights issue is when a company offers existing shareholders the right to purchase additional shares, typically at a discounted price. The number of new shares available is based on the shareholder’s existing ownership. For example, a 1:3 rights issue would allow a shareholder to buy one new share for every three shares they already hold.
Rights issues are a way for companies to raise capital. Shareholders have the option to either buy the new shares or sell their rights to someone else.
