Revenue Tax Briefing

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Revenue Tax Briefing Issue 56, July 2004

First Active Shares

Introduction

First Active plc. was acquired by the Royal Bank of Scotland in January 2004 and shareholders in First Active received a cash payment for their shareholding. This cash payment gives rise to a capital gains tax exposure later this year. In this article we give an overview of the capital gains tax implications of this event and show, with examples, the calculation of the capital gains tax liability arising in a number of different situations.

Cash Payment

On 5 January 2004 the Royal Bank of Scotland (RBS) acquired First Active plc for cash. The acquisition was effected by a scheme of arrangement whereby a wholly owned subsidiary of RBS paid cash to First Active shareholders in consideration of the cancellation of their First Active shares and the issue of new First Active shares to that company. In January 2004 First Active shareholders received €6.20 in cash for each share held.

This cash payment is a capital sum for capital gains tax purposes. The time of disposal is the date on which the cash was received by the shareholder and, accordingly, any liability arising is payable on or before 31/10/2004.

While the chargeable gain on this capital sum is computed in the normal manner consideration should be given to the following:

  • Many shareholders received some or all of their shares free of charge. To the extent that the shares disposed of were ‘free shares’ there are no allowable costs.
  • In June 2003 First Active plc made a capital repayment of €1.12 per share to its shareholders (see Tax Briefing, Issue 53). This payment was also a capital sum for capital gains tax purposes and constituted a part disposal of the original holding at that time. It will be necessary, where shares were purchased, to apportion the allowable costs of acquisition between the payments received in both years.
  • Unused prior year and current year losses, to the extent that they are allowable, must be taken into account when calculating the chargeable gains for the 9 month period to 30/9/2004. In many instances these may include losses incurred on the disposal of shares in Eircom. Details of the allowable costs attributable to Eircom shares are set out in Tax Briefing, Issue 46.

Example 1

‘Free’ shares only

Mr. A acquired 450 ‘free’ First Active shares in 1998. In addition he acquired 45 loyalty shares, at no cost, during 1999 and 2000. On the acquisition of First Active by the Royal Bank of Scotland he received a cash payment of €3,069. His computation of capital gains tax for 2004 is as follows, assuming he has no other chargeable disposals or unused prior year losses.

Cash Received

€3,069

Allowable Costs (Note 1)

Nil

Chargeable Gain

€3,069

Less Personal Exemption (Note 2)

€1,270

Net Chargeable Gain

€1,799

Tax Payable (Note 3)

€359.80

Note 1

As the shares were acquired at no cost they have a ‘nil’ base cost.

Note 2

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 3

The tax is payable on or before 31/10/2004. If Mr. A disposes of other assets during the 9 months to 30/9/2004, his calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 2

Purchased shares only and unused losses.

Ms. B purchased 5000 shares in First Active on 1/7/2000 for €12,500. In June 2003, as a result of an approved capital reduction scheme, she received €5,600 from First Active. This reduction was effected by the issue, and subsequent cancellation, of bonus shares to existing First Active shareholders. Ms. B has a loss of €2,733 on this transaction for 2003, calculated as follows:

Cash Received

€5,600

Allowable Costs (see Note 1)

€8,333

Loss

€2,733

Note 1

As part of the capital reduction scheme each First Active shareholder received 2 bonus shares, at no cost, for each share held. Accordingly, Ms. B received 10,000 shares at no additional cost. For capital gains tax purposes, however, these shares are deemed to have a cost which is in proportion to the cost of the original holding ie, €12,500 × 10000/15000.

Note 2

Assuming she had no other chargeable gains in 2003, Ms. B can offset this loss against future chargeable gains.

In January 2004 Ms. B received €31,000 on the acquisition of First Active by the Royal Bank of Scotland. In addition to her First Active losses of €2,733 she has other unused losses of €750. Her computation of capital gains tax for 2004 is as follows, assuming she has no other chargeable disposals or unused prior year losses.

Cash Received

€31,000

Allowable Costs (Note 3)

€4,767

Chargeable Gain

€26,233

Less Unused Prior Year Losses

€3,483

€22,750

Less Personal Exemption (Note 4)

€1,270

Net Chargeable Gain

€21,480

Tax Payable (Note 5)

€4,296

Note 3

The shares were purchased for €12,500. Part of this amount i.e., €8,333, was utilised in 2003 and the balance of €4,167, after adjustment for inflation, is deducted in calculating the 2004 gain. The inflation multiplier, 1.144, is applied to the allowable cost (€4,167 × 1.144).

Note 4

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 5

This tax is payable on or before 31/10/2004. If Ms. B disposes of other assets during the 9 months to 30/9/2004, her calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 3

‘Free’ shares only and unused losses.

Mr. E acquired 450 ‘free’ First Active shares in 1998. In addition he acquired 45 loyalty shares, at no cost, during 1999 and 2000. In June 2003, as a result of an approved capital reduction scheme, he received €554 from First Active. He had unused losses of €800. His computation of chargeable gains tax for 2003 is as follows, assuming he had no other chargeable disposals in that year.

Cash Received

€554

Unused losses forward (to cover)

€554

Chargeable gain

nil

On the acquisition of First Active by the Royal Bank of Scotland Mr. E received a cash payment of €3,069. His computation of capital gains tax for 2004 is as follows, assuming he has no other chargeable disposals.

Cash received

€3,069

Allowable Costs (Note 1)

Nil

Chargeable Gain

€3,069

Unused prior year losses (Note 2)

€246

€2,823

Less Personal Exemption (Note 3)

€1,270

Net Chargeable Gain

€1,553

Tax Payable (Note 4)

€310.60

Note 1

As the shares were acquired at no cost they have a ‘nil’ base cost.

Note 2

This is the balance of the losses (800 - 554).

Note 3

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 4

The tax is payable on or before 31/10/2004.

If Mr. E disposes of other assets during the 9 months to 30/9/2004, his calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 4

Mixture of ‘free’ and purchased shares acquired on the same date.

Mr. C acquired 450 ‘free’ First Active shares on flotation in October 1998. In addition, he purchased 800 shares for €2,300 at the same time. Subsequently, he received 45 loyalty shares during 1999 and 2000. In June 2003, as a result of an approved capital reduction scheme, he received €1,450 from First Active. For capital gains tax purposes his allowable expenditure was €1,188 (see Note 1).

Note 1

As part of the capital reduction scheme each First Active shareholder received 2 bonus shares, at no cost, for each share held. These shares are deemed to have acquired at the same date as the original holding. Accordingly, Mr. C received 2,590 shares at no additional cost. For capital gains tax purposes, shares of the same class are treated as being disposed of on a ‘first in first out’ basis where they were acquired at different dates. Difficulties can arise where, on flotation, an individual bought shares and acquired ‘free’ shares and, in these circumstances, Revenue accept that the shareholder may nominate the block of shares from which the disposal has been made. In this example the ‘free’ shares were disposed of first.

Mr. C disposed of 2,590 shares which comprised 1,350 ‘free’ shares with no attaching costs and 1,240 shares with an aggregate cost of €1,188 (2300 × 1240/2400). The unused costs of €1,112 are carried forward.

In January 2004 Mr. C received €8,029 on the acquisition of First Active by the Royal Bank of Scotland. His computation of capital gains tax for 2004 is as follows, assuming he has no other chargeable disposals or unused prior year losses.

Cash Received

€8,029

Allowable Costs (Note 2)

€1,348

Chargeable Gain

€6,681

Less Personal Exemption (Note 3)

€1,270

Net Chargeable Gain

€5,411

Tax Payable (Note 4)

€1,082.20

Note 2

The shares were purchased for €2,300. Part of this amount ie, €1,188, was utilised in 2003 and the balance of €1,112, after adjustment for inflation, is deducted in calculating the 2004 gain. The inflation multiplier, 1.212, is applied to the allowable cost (€1,112 × 1.212).

Note 3

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 4

This tax is payable on or before 31/10/2004. If Mr. C disposes of other assets during the 9 months to 30/9/2004, his calculation of tax payable will be based on the aggregate of all disposals in that period.

Example 5

Mixture of ‘free’ and purchased shares acquired at different dates.

Ms. D acquired 450 ‘free’ First Active shares on flotation in October 1998. She subsequently received 45 loyalty shares during 1999 and 2000. In July 2001 she purchased 7,000 shares for €17,500. In June 2003, as a result of an approved capital reduction scheme, she received €8,394 from First Active. Ms. D has a loss of €2,860 on this transaction for 2003, calculated as follows:

Cash Received

€8,394

Allowable Costs (see Note 1)

€11,254

Loss

€2,860

Note 1

As part of the capital reduction scheme each First Active shareholder received 2 bonus shares, at no cost, for each share held. Accordingly, Ms. D received 14,990 shares at no additional cost. These shares are deemed to have been acquired at the same date as the original holding. For capital gains tax purposes, shares of the same class are treated as being disposed of on a ‘first in first out’ basis where they were acquired at different dates. Ms. D disposed of 14,990 shares which comprised 1485 ‘free’ shares with no attaching costs and 13,505 shares with an aggregate cost of €11,254 (17,500 × 13505/21000). The unused costs of €6,246 are carried forward.

Note 2

Assuming she had no other chargeable gains in 2003, Ms. D can offset this loss against future chargeable gains.

In January 2004 Ms. D received €46,469 on the acquisition of First Active by the Royal Bank of Scotland. Her computation of capital gains tax for 2004 is as follows, assuming she has no other chargeable disposals or unused prior year losses.

Cash Received

€46,469

Allowable Costs (Note 3)

€6,789

Chargeable Gain

€39,680

Less Unused Prior Year Losses

€2,860

€36,820

Less Personal Exemption (Note 4)

€1,270

Net Chargeable Gain

€35,550

Tax Payable (Note 5)

€7,110.00

Note 3

The shares were purchased for €17,500. Part of this amount ie, €11,254, was utilised in 2003 and the balance of €6,246, after adjustment for inflation, is deducted in calculating the 2004 gain. The inflation multiplier, 1.087, is applied to the allowable cost (€6,246 × 1.087).

Note 4

The first €1,270 of an individual’s net gains is not chargeable. This exemption is not transferable between spouses.

Note 5

This tax is payable on or before 31/10/2004. If Ms. D disposes of other assets during the 9 months to 30/9/2004, her calculation of tax payable will be based on the aggregate of all disposals in that period.

The following articles, which appeared in previous issues of Tax Briefing may be of assistance when preparing your clients’ capital gains tax return for 2003:

Jefferson Smurfit Shares (takeover by MDCP Acquisitions Ltd) Tax Briefing Issue 53 (August 2003)

First Active plc (Repayment of capital )Tax Briefing Issue 53 (August 2003)

Eircom Shares (Calculation of Base Cost) Tax Briefing Issue 46 (December 2001).