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Takeovers & Mergers: Share & Large Cash Settlement

Let us consider the tax implications when the cash received is classified as "large".

Amending our example, a shareholder now owns 10,000 shares in Company ABC purchased @ 100 pence per share.
Cost base for original holding of ABC plc shares = 10,000 x 100p = £10,000

Company ABC plc is merged with Company XYZ plc. Under the terms of the merger for every share you hold in Company ABC plc you receive 1.5 ordinary shares in Company XYZ plc and 50p in cash.

The price of ABC plc shares on the day before the merger is 200p
The price of XYZ plc ordinary share on the day of the merger = 175p

Market value of ABC plc share holding the day before the merger = 10,000 x 200p = £20,000

Firstly we need to determine if the cash settlement is "small" or "large".

Total cash received = 50p x 10,000 shares
Total cash received = £5,000

The cash settlement is greater than £3,000 and represents more than 5% of the market value of your ABC plc holding immediately before the merger:
£5000/(£20,000) = 25%

In this instance therefore the cash settlement is classed as "large" and so there will be a gain or loss to declare on the cash received. To work out this gain or loss you need apportion the original cost of the ABC plc shares between the cash received and the shares received We initially paid £10,000 for 10,000 shares in ABC plc. And on merger received:

Cash settlement = £5,000
Number of shares in XYZ plc = 1.5 x 10,000 = 15,000 shares
Market value of XYZ plc share holding on day of merger = 15,000 x 175p = £26,250

The cost apportioned to the cash settlement is calculated as:

cash settlement cost base = Original cost base ABC plc x [(value of cash received)/(value of cash received + market value of XYZ plc received)]
cash settlement cost base = Original cost base ABC plc x [£5,000/(£5,000 + £26,250)]
cash settlement cost base = £10,000 x [0.16]
cash settlement cost base = £1,600

As far as HMRC are concerned you have made a gain from the cash settlement, this is calculated as: Capital Gain = Cash settlement received - cash settlement cost base
Capital Gain = £5,000 - £1,600
Capital Gain = £3,400

You also own the 15,000 new shares in XYZ plc. The cost apportioned to these new shares is calculated as:
XYZ plc cost base = Original cost base ABC plc x [(market value of value of XYZ plc shares received)/(value of cash received + market value of XYZ plc shares received)]
cash settlement cost base = Original cost base ABC plc x [£26,250/(£5,000 + £26,250)]
XYZ plc cost base = £10,000 x [0.84]
XYZ plc cost base = £8,400

This is the cost base you will go on to use when calculating your future gains or losses on disposal of your XYZ plc share holding.

And the average cost of each share in your XYZ plc holding: Average cost per share = £26,250 / 15,000 shares
Average cost per share = 175p

To see how you would manage a settlement involving both shares and cash settlement using timetotrade's Capital Gains Tax calculator and Share Reorganisation wizard, click here Example: Share & Small Cash Settlement>>

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