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Demerger of Friends Provident Group

Friends Provident Plc owned a 52.05% shareholding in F&C Asset Management Plc (a separately listed company). After a strategic review it was identified that F&C did not fit with the group's future strategy and so it was decided that Friends Provident demerge the shares it owned in F&C and distribute them to Friends Provident shareholders by way of Return of Capital.

The Friends Provident / F&C Demerger took place in two stages:

Stage 1: Reorganisation:
The first stage was a Reorganisation, which was voted by shareholders on 21 May 2009, whereby shareholders exchanged their Friends Provident Plc Shares for ordinary shares in a newly formed holding company: Friends Provident Group Plc. The purpose of which was to provide Friends Provident with the flexibility to engage in further corporate transactions - in particular, the disposal of the Group's stake in F&C. Under the terms of the reorganisation, each shareholder received one New Ordinary Share in Friends Provident Group Plc for every Friends Provident Plc share held.


Stage 2: Return of Capital:
Although given the name "Demerger" the second stage is actually classed as a "Return of Capital" to shareholders via the issue of 1 F&C share for every 10 new ordinary Friends Provident Group shares held. Shareholders were given the option to either receive this return of capital as F&C shares or receive cash in lieu. Either way for Capital Gains Tax purposes the shares or cash received are deemed to be consideration for a part disposal of the Friends Provident Group Plc shares.

The value of the consideration for the part disposal is the market value of the shareholder's entitlement to the F&C shares, on the "Demerger Effective Date", ie 3rd July 2009 - whether the shareholder actually receives the F&C Shares or elects for a cash settlement instead.

The tax treatment depends on whether the consideration (ie market value of the shareholder's F&C share entitlement on the Demerger Effective date) is classed as 'large' or 'small' relative to the market value of the Friends Provident Group Plc shares on the day before the Demerger Effective Date.

The consideration is classed as small if the market value of the F&C share entitlement is less than £3,000 or less than 5% or the market value of the the Friends Provident Group Plc shares on the day before the Demerger Effective Date; and the consideration is classed as 'large' if it is greater than £3,000 or more than 5% of the market value of the Friends Provident Group Plc shares on 2nd July 2009.


Firstly let us look at an example where the consideration is classed as "small".

"Small Cash"
According to the Friends Provident Group / F&C Demerger Circular, if the consideration is classed as "small", the consideration amount is deducted from the base cost of the Friends Provident Group Plc shares. Whilst the base cost of the F&C shares to which the shareholder is entitled is equal to the market value of the F&C shares on the Demerger Effective Date.

Let us say for illustration you purchased 10,000 shares in Friends Provident Plc on 1 June 2008 for 100p, giving you a base cost of £10,000 (for simplicity of illustration only we will assume no stamp duty or commissons were paid on the purchase).
Following the inital reorganisation you then own 10,000 shares in Friends Provident Group Plc with the same £10,000 base cost.
The market value of the Friends Provident Group Plc shares on the 2nd March 2009 was 68.09p
The market value of the Friends Provident Group Plc shares on the 3rd March 2009 was 63.24p
The market value of the F&C Asset Management Plc shares on the 3rd March 2009 was 66.4055p
And assume that you opt to receive the shares in F&C (rather than cash)

Pre demerger you own:
10,000 shares in Friends Provident Group Plc with market value £6809.00


On demerger effective date you own:
10,000 shares in Friends Provident Group Plc with market value £6324.00 PLUS
1,000 shares in F&C Asset Management with market value £664.055

For CGT purposes you are deemed to have received £664.055 in consideration, (ie the market value of the F&C shares ), and acquired the F&C shares for the same. ie, the base cost of the F&C shares is deemed to be equal to the market value of the F&C shares on the Demerger Effective Date.

The £664.055 consideration is classed as 'small' cash because it is less than £3,000. As it is classed as 'small' there is no immediate liability to Capital Gains Tax. Instead, the consideration is deducted from the base cost of the Friends Provident Group shares.

So, post demerger you will own :
10,000 shares in Friends Provident Group with a base cost = (£10,000 - £664.055) = £9335.945
1,000 shares in F&C Asset Management with a base cost = £664.055


Let us now look at how the demerger is input into timetotrade. It is important to point out that although given the name "Demerger", this return of capital on your Friends Provident Group Plc shares is not a share reorganisation in the usual sense, it is a part disposal. As such, the way in which you input the demerger into to timetotrade does differ to a usual demerger.

Firstly you need to make sure your original purchase of Friends Provident shares is included in your open positions portfolio, as below:


Friends Provident Demerger.png


To add the Demerger, click on the "share reorganisation" button, as illustrated above. This will take you to the Share Reorganisation page.

Select the Effective Date of the Demerger from the drop down menu, in this case 3rd July 2009.


Friends Provident Demerger 2.png


Next, from the drop down menu select the shareholding that is subject to the demerger, in this instance select FP.L

Friends Provident Demerger 3.png


Now we need to specify the type of share reorganisation. In this instance select "Demerger".


Friends Provident Demerger 4.png


Next, we need to complete the fields so that timetotrade can determine if the consideration received (ie the market value of the F&C shares) is classed as 'large' or 'small' for CGT purposes. Complete the fields as shown below:


Friends Provident Demerger 5.png


After the demerger you own 1 share of Friends Provident Group Plc shares for every Friends Provident Group share held prior to the demerger.

Symbol = input the ticker symbol for FP.L

Share Issue Ratio = input the ratio of new shares in Friends Provident received for every old share owned. In this example we receive 1 FP.L share for every FP.L share held, so input 1:1

Shares Issued = you can leave this blank

Fractional Shares = no fractional shares were issued as a result of the demerger, so leave this field as "no".

Issue Price = input the Friends Provident Group share price on the day before the effective date of the merger. This information will be used to determine if the consideration is classed as 'large' or 'small'. In this instance the share price on 2nd July 2009 was 68.09p, this figure needs to be input as pounds GBP, so in this case input as 0.6809

Cash Received = Enter here the market value of the F&C shares as on the merger effective date. This is the amount you are deemed to have received in consideration, so enter the amount as cash received, even if you actually elected to receive F&C shares.

You can now click the "submit" button.

This will take you to the following summary page, click on the link to return to your share portfolio.


Friends Provident Demerger 6.png


As you can see in the screen shot below, the base cost of the Friends Provident shares has been reduced by the deemed consideration for the F&C shares.


Friends Provident Demerger 7.png


The next step is to put in the acquisition of the F&C shares. Input this as you would a usual share purchase, so click the "add/edit" button as shown:


Friends Provident Demerger 8.png


And input a purchase of F&C shares.

Date = the demerger effective date

Symbol = FCAM.L (remember to use the .L after the epic in timetotrade)

Asset Type = leave this as "not applicable" (taper relief and the concept of non-business and business assets are no longer applicable since April 2008)

Quantity = enter the number of shares in F&C you receive / entitled to receive as a result of the Demerger.

Price = enter the share price of the F&C shares on the demerger effective date, ie 66.4055p

Commission = leave blank

Tax = leave blank, no stamp duty reserve tax is payable for the F&C shares


Friends Provident Demerger 9.png


Click the "add" button. This will add the transaction to your accounts. Once finished, click the "done" button.


Friends Provident Demerger 10.png


"Large Cash"
Let us now consider the CGT implications if the cash or shares received in consideration are classed as "large".

We will amend our previous example slightly and let us say for illustration you purchased 100,000 shares in Friends Provident Plc on 1 June 2008 for 100p, giving you a base cost now of £100,000 (for simplicity of illustration only we will assume no stamp duty or commissons were paid on the purchase).
Following the inital reorganisation you then own 100,000 shares in Friends Provident Group Plc with the same £100,000 base cost.
The market value of the Friends Provident Group Plc shares on the 2nd March 2009 was 68.09p
The market value of the Friends Provident Group Plc shares on the 3rd March 2009 was 63.24p
The market value of the F&C Asset Management Plc shares on the 3rd March 2009 was 66.4055p
And assume that you opt to receive the shares in F&C (rather than cash)

Pre demerger you own:
100,000 shares in Friends Provident Group Plc with total market value £68,090.00

On demerger effective date you own:
100,000 shares in Friends Provident Group Plc with total market value £63,240.00 PLUS
10,000 shares in F&C Asset Management with total market value £6,640.55

For CGT purposes you are deemed to have received £664.055 in consideration, (ie the market value of the F&C shares ), and acquired the F&C shares for the same. ie, the base cost of the F&C shares is deemed to be equal to the market value of the F&C shares on the Demerger Effective Date.

The £6,640.55 consideration is classed as 'large' cash because:
1) it is greater than than £3,000; and
2) it is greater than 5% of the pre-demerger market value of the Friends Provident Group Plc shares.

As it is classed as 'large' the re is an immediate gain or loss to be calculated. Instead, the consideration is deducted from the base cost of the Friends Provident Group shares.

As explained in the Friends Provident Group / F&C Demerger Circular :
"A Shareholder’s gain or loss in respect of the part disposal will be calculated as a gain or loss by reference to a proportion of the base cost of that Shareholder’s holding of the [Friends Provident Group Plc] New Ordinary Shares . That proportion is determined according to the formula A/(A+B) where ‘‘A’’ is the market value of the F&C Shares to which the Shareholder is entitled and ‘‘B’’ is the market value of the Shareholder’s [Friends Provident Group] New Ordinary Shares immediately following the Demerger.

"The part disposal of New Ordinary Shares as a result of the Demerger may, depending on each Shareholder’s individual circumstances (including the availability of exemptions, reliefs and allowable losses), give rise to a liability to UK taxation on chargeable gains."

For CGT purposes the demerger is deemed to be part disposal. The consideration (disposal proceeds) is deemed to be £6,640.55. The base cost for determining the gain or loss on the part disposal is calculated as:
Base cost of Friends Provident Group Plc holding x A/(A+B)
= £100,000 x (£6,640.55)/(£6,640.55 + 63,240.00)
= £9,502.716

There is an immediate Capital Gain / Loss, which in this example is calculated as:

Disposal proceeds = £6,640.55
Less Base Cost = £9,502.72
Loss = (£2,862.17)

As noted in the Circular, "After the part disposal of [Friends Provident Group] New Ordinary Shares pursuant to the Demerger, a Shareholder’s base cost in his New Ordinary Shares for UK taxation of chargeable gains purposes will change. It will be reduced by the amount of base cost attributable to the part disposal under the formula A/(A+B) described above.
The base cost for UK taxation of chargeable gains purposes of the F&C Shares to which a Shareholder is entitled pursuant to the Demerger should be equal to the market value of the F&C Shares on the Demerger Effective Date.

And so, post demerger you will then be deemed to own :
100,000 shares in Friends Provident Group with a base cost = (£100,000 - £9,502.72) = £90,497.28; and
10,000 shares in F&C Asset Management with a base cost = £6,640.55


Let us take a look at how you would input a large cash consideration into timetotrade. As before, ensure the Friends Provident Group shares have been entered into your portfolio, and click the "share reorganisation" button.


Friends Provident Demerger 11.png

As before, input the reorganisation date as the 3rd July 2009 - the demerger effective date; the share to be reorganised is the FP.L long and select the reorganisation type "demerger" from the drop down menu as previously.

After the demerger you own 1 share of Friends Provident Group Plc shares for every Friends Provident Group share held prior to the demerger, so input the details as follows:

Symbol = input the ticker symbol for FP.L

Share Issue Ratio = input the ratio of new shares in Friends Provident received for every old share owned. In this example we receive 1 FP.L share for every FP.L share held, so input 1:1

Shares Issued = you can leave this blank

Fractional Shares = no fractional shares were issued as a result of the demerger, so leave this field as "no".

Issue Price = this time input the Friends Provident Group share price on the effective date of the demerger. In this instance the share price on 3rd July 2009 was 66.4055p, this figure needs to be input as pounds GBP, so in this case input as 0.664055

Cash Received = Enter here the market value of the F&C shares as on the merger effective date. This is the amount you are deemed to have received in consideration of the part disposal, so enter the amount as cash received, even if you actually elected to receive F&C shares.

Under current HM Revenue & Customs practice, any consideration with a value of £3,000 or less or which is, in any event, five per cent or less of the value of a Shareholder’s holding of New Ordinary Shares, will generally be treated as small for these purposes. If the value of the consideration (being the market value of the F&C Shares to which the Shareholder is entitled on the Demerger) exceeds the base cost of the Shareholder’s holding of New Ordinary Shares, however, or if the value of such consideration is not considered ‘‘small’’ by HM Revenue & Customs, the Shareholder will be treated as disposing of part of his or her holding of New Ordinary Shares and may, depending on circumstances, incur a liability to taxation of chargeable gains in respect of any gain thereby realised.

Shareholders who become entitled to F&C Shares which are sold on their behalf under the Cash-out Procedure are referred to paragraph (d) below.

Base Costs
Save where the value of the F&C Shares to which a Shareholder is entitled is ‘‘small’’ (in which case the treatment described above will apply), after the part disposal of New Ordinary Shares pursuant to the Demerger, a Shareholder’s base cost in his New Ordinary Shares for UK taxation of chargeable gains purposes will change. It will be reduced by the amount of base cost attributable to the part disposal under the formula A/(A+B) described above.

The base cost for UK taxation of chargeable gains purposes of the F&C Shares to which a Shareholder is entitled pursuant to the Demerger should be equal to the market value of the F&C Shares on the Demerger Effective Date.

Future Disposal of New Ordinary Shares
If a Shareholder subsequently disposes of his New Ordinary Shares, the adjusted base cost (following the Demerger) will be used in the calculation of any UK taxation on chargeable gains. A disposal of New Ordinary Shares may, depending on each Shareholder’s individual circumstances (including the availability of exemptions, reliefs and allowable losses), give rise to a liability to UK taxation on chargeable gains.


Disposal of F&C Shares pursuant to the Cash-out Procedure and Future Disposal of F&C Shares
If a Shareholder disposes of the F&C Shares he receives or to which he becomes entitled, whether as a result of the Cash-out Procedure or subsequently, the base cost established on the acquisition of the F&C Shares under the Demerger will be used in the calculation of any UK taxation on chargeable gains. A disposal of F&C Shares, including as a result of the Cash-out Procedure, may therefore, depending on each Shareholder’s individual circumstances (including the availability of exemptions, reliefs and allowable losses), give rise to a liability to UK taxation on chargeable gains.




Please note that the exact apportionment figures must be calculated according to each shareholder's individual shareholdings and it is for individual shareholders to calculate these figures. The information set out above does not constitute tax advice and, for specific advise about your own position, you should consult your own tax adviser.


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