Money: X marks the spot for capital gains tax - or does it? Only if you're unlucky

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The Independent Online
Every week there seems to be an announcement in the business pages of a takeover, with shareholders getting some sort of payout. As if to show the corporate world is in constant flux, in alternate weeks there is often an announcement of a demerger or some sort of buyback. Often these are stated as tax efficient, but why are they, and how are the shareholders affected?

Let's suppose that you're a shareholder in X plc and you've just got a "this document is important - if in any doubt consult your tea leaves" type of mailing. It seems that Y plc has made an offer for X. Are you going to suffer tax if you accept this offer?

If you give up your X shares to Y, you've disposed of the shares. That means in principle that capital gains tax is looming on the value you've received. If you get cash, that's it - CGT bites. But take shares in Y instead of the cash and in most circumstances there's no immediate CGT. The Y shares will in effect step into the shoes of the X shares as far as you're concerned.

Of course, if you get a mix of cash and shares, that means some gain now, some later. If you get loan stock, that will also hold over the gain. All of these make it possible to sell your resultant holding over a number of years and make the most of the CGT annual exemptions.

It's possible that X makes you a different offer. They'd like to buy back your shares. Now you're going to have to be careful - you do need to read that paperwork they send through. If you sell the shares to the company you might expect to get a CGT charge. In fact you normally wouldn't: it would be treated as income. This is because you're getting value out of the company and usually when value comes out it's treated as a distribution - a dividend if you prefer.

ACT will be paid by the company; you will be treated as if you received a dividend with a tax credit along the lines of that ACT. The quirk is that the dividend you're treated as receiving depends on the original subscription price of the shares.

You can get a CGT result by selling the shares to a broker. This is why share buyback offers usually come with a tame broker ready to buy back your shares. They'll sell the shares on back to the company and you can use your CGT annual exemption. But if you're already paying CGT, the dividend route may be better.

A third option that X may announce may be a demerger. Now the company is offering new shares in a part of itself - let's call it XX plc. Is this a good deal?

The answer is usually yes. The stock market invariably thinks that X and XX separately are worth more than the original X when it owned XX. You've got two pieces of paper which can be sold separately. But if you take those XX shares, you've disposed of some of your interest in X so does that mean CGT?

Again, the starting point is a yes answer but in practice the answer is no. As with takeovers, there is a relief around. The Inland Revenue will have cleared X's demerger so that you end up with no CGT charge until you dispose of one or other of the X or XX paper. The original cost of your X holding is split between the two.

So the net result of all these corporate comings and goings is usually no tax bill to the shareholders. Apart from stamp duty, there's usually no tax at the corporate level.

John Whiting is a tax partner at Price Waterhouse

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