RBS rights issue - what will your tax situation be?

Royal Bank of Scotland (RBS) has announced that it is to make a rights issue to its shareholders in order to raise £12 billion of funds. Many taxpayers now have decisions to make. How will the new capital gains tax rules apply to those who take up this rights issue if they sell their shares in the future?

How are rights issues treated for capital gains tax (CGT)?

A rights issue is treated as a new acquisition for CGT purposes. The amount paid for the shares is used to calculate the 'base cost' which is necessary to work out any taxable capital gain on disposal. The base cost is the amount deducted when calculating the capital gain.

The position is complicated where a part disposal of shares is made (eg 200 RBS shares sold out of a total holding of 1,000 RBS shares). In this case the CGT legislation applies 'matching rules' in order to determine which of the 1,000 shares have been disposed of. A base cost can then be given to the shares and used in the calculation of the capital gain (or loss).

How have recent changes to CGT affected the matching rules for shares?

The changes to the CGT rules on 6 April 2008 now make it much simpler to calculate the base cost on a part disposal of shares. Under the new rules you 'match' disposals first with acquisitions on the same day, then with acquisitions in the next 30 days (to prevent quick sales and repurchases to get tax advantages which is more commonly called 'bed and breakfasting'). Finally all other acquisitions of shares of the same company and class are pooled together (including past acquisitions). Under the previous rules, there were several different share pools depending on when the shares were acquired and each acquisition after 5 April 1998 was treated as a separate holding. The same day and 30 day rules also applied.

However, one effect of the new pooling rules is that all previous share acquisitions (including those acquired many years ago and therefore probably at a much lower price) are now pooled together, thus diluting the base cost for the more recently acquired shares with the higher acquisition cost. This will affect part disposals as previously, recent acquisitions (after 5 April 1998) were treated as being disposed of on a 'last in first out' basis. The change in the matching rules does not affect the CGT calculation where the entire holding is disposed of, as the acquisition costs of all the shares will be taken into account. The effect of the changes is best shown by way of an example.

Example

The following share acquisitions are made (same company and same class of share):

• 500 in 1985 for £500
• 500 in 1993 for £2,000
• 250 in 1996 for £1,250
• 250 in 2006 for £2,500

Then assume a disposal of 200 of these shares on or after 6 April 2008 for £2,200. The above share acquisitions and costs are pooled together so that the 1,500 shares have a total pooled cost of £6,250. The 200 being disposed of on or after 6 April 2008 therefore have a base cost of £833 (£6,250 x 200/1,500). This would give a capital gain of £1,367.

For a disposal prior to 6 April 2008, the 200 shares would have had a base cost of £2,000 (£2,500 x 200/250), as they would have been 'matched' with the most recent acquisition (being the 250 shares acquired in 2006). This would then have given a capital gain of only £200.

Of course there would also be the annual CGT exemption of £9,600 to set against this gain (assuming it had not been used elsewhere).

Francesca Lagerberg, Head of Grant Thornton's National Tax Office says: "Often people make disposals throughout the year in order to use up their annual CGT exemption. These individuals will need to take particular care going forward to ensure the disposals made do not give rise to larger capital gains than expected."