If the company taking over gives you cash and shares you may have to pay Capital Gains Tax on the cash you get.
If you get a small amount of cash
You don’t pay Capital Gains Tax if both of the following apply:
- you get less than £3,000 or an amount less than 5% of the value of your shares in the company, valued just before the takeover
- the cash you get is less than the cost of your original shares
When you sell or dispose of your new shares and work out your capital gain your allowable cost will be the cost of the original shares less the amount of cash you get.
If you get cash that’s more than the cost of your original shares you need to work out your capital gain on the amount you get.
Calculate your capital gain:
- in the way described for larger amounts of cash
- on the difference between the cash you get and the cost of your original shares
You must elect to do this; it will reduce the cost of your new shares to nil. You do this in your tax return.
When you sell or dispose of your new shares you use a cost of nil to work out your capital gain.
You get £2,000 cash and 2000 new shares in a company takeover.
Your original shares in the old company cost £1,500.
The sum of cash is small but it’s more than the original cost, so you need to work out the capital gain.
You elect to reduce your allowable costs to nil and to be taxed on the excess.
You’ll need to work out the capital gain on the excess of £500 (£2,000 – £1,500).
If you get a larger amount of cash
You may owe tax if:
- you get shares and more than £3,000 cash
- you get an amount that’s equal to or more than 5% of the value of your shares in the original company, valued just before the takeover
To work out your capital gain you need to allocate a ‘cost’ to this cash payment. You do this by splitting the original cost of the shares proportionally between the cash you get and the new shares:
- work out the value of the cash in proportion to the total value of the cash and shares you get
- split the cost of your original shares between the cash and the new shares in the same proportion as the value
You buy 800 ordinary shares in company A for £1,000.
Company B takes over company A.
You get 1,600 shares in company B with a value of £9,600 (£6 for each share).
You get cash of £3,200 (£4 for each company A share you held).
The sum of cash is more than £3,000, so you need to work out the capital gain.
First, work out the allowable cost:
- the total value of cash and shares you get as a result of the takeover is £12,800 (£3,200 cash + £9,600 shares)
- proportionally, the cash you got was 25% of the total value (3,200/12,800 = 25%).
- split the total costs of £1,000 paid for the original shares – between the cash and the new shares in the same proportion
The allowable cost for the cash you got is £250 (25% x the £1,000 total cost).
Work out the taxable gain. This is £2,950 (£3,200 cash less £250 cost).