Q: I received 2 for 3 shares at £2.25 per share. I had 5600 shares at £1.75 per share. I received £5459.74 in March 2009, as part of the rights was not taken up. What is the capital gain?

A: A sale of rights is classed as a part disposal for capital gains tax purposes. The tax calculation is based on the increase in value of a proportion of the original shareholding. Under normal circumstances, the proceeds will be the amount received for the sale of the rights (i.e. £5,459 in your case).

The sale of rights is not treated as a disposal if the proceeds are ‘small’. ‘Small’ is not defined in the legislation. However, HMRC states that it will treat proceeds as small if they are equal to or less than five per cent of the value of the underlying shares (at the date of the rights issue), or £3,000, whichever is the greatest of these figures. So ‘small’ does not apply to you.

When calculating the capital gain the cost of the rights is taken to be a proportion of the base cost of the shares creating the rights. When all the rights are sold, this proportion is given by the following formula: base cost × sale proceeds / (current value of original shares + sale proceeds).

When only some of the rights are disposed of, and some are taken up, the above formula changes to base cost × sale proceeds / (Current value of original shares + value of rights taken up + sale proceeds).
Therefore in your case you’d need to be able to value the rights taken up to determine the base cost of the rights sold...

Excerpted from an article originally published in the Jan/Feb 2012 issue of YourTradingEdge magazine UK. All rights reserved. © Copyright 2012, Your Media Edge Pty Ltd.
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