Bonus issues and rights issues: CGT base cost

Q: How does this work in practice?

Illustration only. Beth holds 2,000 shares in a listed company in a section 104 pool costing £6,000. The company makes a one for four bonus issue. Beth now holds 2,500 shares. The pool cost stays at £6,000, which is £2.40 a share. Later the company makes a one for five rights issue at £3 a share. Beth takes up all 500 new shares and pays £1,500. Her pool is now 3,000 shares costing £7,500. If she later sells 1,000 shares, the allowable cost is 1,000 / 3,000 of £7,500, which is £2,500. Suppose instead she had sold all her rights nil paid for £400 when her 2,500 shares were worth £10,000. The proceeds are 4% of the value of her holding and under £3,000, so the sale is small. There is no disposal and her pool cost falls from £6,000 to £5,600.

For Capital Gains Tax, new shares from a bonus issue or a rights issue are not a new purchase. They are treated as part of the original holding, acquired when and as the original shares were, so a bonus issue spreads the same cost over more shares and a rights issue adds what you paid to the existing cost. Selling the rights instead of taking them up is a capital distribution with its own rules.

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Why is a bonus or rights issue not treated as a new purchase?

Section 126(2)(a) of the Taxation of Chargeable Gains Act 1992 (TCGA 1992) treats an allotment of shares or debentures to shareholders in proportion to their holdings, whether for payment or not, as a reorganisation of share capital. HMRC’s Capital Gains Manual at CG51746 describes bonus issues and rights issues as probably the most common types: in a bonus issue the new shares are issued free, in a rights issue the shareholders pay for them.

Section 127 then applies two statutory fictions, described at CG51805. There is no disposal of the original shares and no acquisition of the new ones, and the original shares and the new holding are treated as the same asset, acquired as the original shares were acquired. The new shares do not start a new holding period and are not a fresh acquisition on the issue date. The company law side of a bonus issue is covered in bonus issues and capitalisation of reserves.

How does a bonus issue change the base cost?

Where the bonus shares are of the same class as the original shares, nothing is added to the cost. CG51701 explains that for disposals on or after 6 April 2008 new shares of the same class are pooled with the original shares in the section 104 holding. The pool has more shares but the same total cost, so the cost per share falls.

Where the bonus shares are of a different class, such as preference shares issued on ordinary shares, the original cost has to be split between the classes. Under section 129 the split uses market values at the time of the later disposal where the shares are unquoted. Under section 130, if any of the shares or debentures are quoted, the split uses market values at the date of the reorganisation (CG51702). CG51920 works through an example with ordinary, ‘A’ ordinary and preference shares.

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How is a rights issue added to the pool?

Section 128(1) treats any consideration you give for the new holding as given for the original shares. For a rights issue of the same class, you add the new shares to the pool and add the subscription price to the pool cost. CG51930 shows the same approach where the rights shares are of a different class: the amount paid is added to the original cost before the total is apportioned between the classes.

For companies, indexation allowance still applies. CG51860 explains that the rights issue is an operative event for a section 104 holding, so the indexed pool is brought up to date before the new cost is added, and indexation on the new money runs only from the date it was paid or became payable (section 131). Indexation does not apply for Capital Gains Tax from 2008 to 2009.

Section 128(2) contains a limit aimed at private company arrangements: consideration not given by way of a bargain at arm’s length is disregarded to the extent it exceeds the increase in value of the holding. CG51840 onwards covers this anti avoidance rule, which is most likely to arise where the shareholder controls the company.

What if I sell my rights instead of taking them up?

A rights issue usually comes with a provisional letter of allotment. Selling it, known as selling the rights nil paid, is treated by section 123 as a capital distribution in respect of the original shares, and section 122 then applies (CG57855).

If the proceeds are small compared with the value of the holding, the sale is not a disposal and the proceeds are deducted from your pool cost. HMRC accepts 5% or less of the value of the holding, or £3,000 or less, as small. If the proceeds are not small, the sale is a part disposal using the A over A plus B formula, where A is the proceeds and B is the value of the holding. CG57857 works an example where proceeds of £3,500 against a holding worth £53,500 were 6.5% and therefore treated as a disposal. The rules are explained in small capital distributions.

If you take up part of your rights and sell the rest, CG57863 explains that the value of what you keep, B in the formula, depends on whether you have already accepted the allotment for the shares you are taking up.

What about lapsed rights and fractions?

If you let your rights lapse, the company will often sell your entitlement and pay you the proceeds. Where a bonus or rights issue produces fractional entitlements, such as a one for three bonus issue on 100 shares, the company usually sells the fractions and distributes the cash. CG57855 notes that these payments are likely to be small capital distributions, and CG57800 confirms that cash paid for fractions falls within section 128(3) but can still qualify for the small distribution treatment.

Are open offers and placings treated the same way?

Not entirely. CG51756 says that in an open offer, a subscription up to the shareholder’s own minimum entitlement is treated as a share reorganisation, but any shares subscribed for in excess of that entitlement are a new purchase outside the reorganisation rules. Those excess shares are a normal acquisition on their own date and are subject to the usual share matching rules.

Scrip dividends from UK companies are also excluded from reorganisation treatment by section 142 and carry a cost equal to their cash equivalent; see scrip dividends and their CGT base cost.

How does this work in practice?

Illustration only. Beth holds 2,000 shares in a listed company in a section 104 pool costing £6,000.

The company makes a one for four bonus issue. Beth now holds 2,500 shares. The pool cost stays at £6,000, which is £2.40 a share.
Later the company makes a one for five rights issue at £3 a share. Beth takes up all 500 new shares and pays £1,500. Her pool is now 3,000 shares costing £7,500.
If she later sells 1,000 shares, the allowable cost is 1,000 / 3,000 of £7,500, which is £2,500.

Suppose instead she had sold all her rights nil paid for £400 when her 2,500 shares were worth £10,000. The proceeds are 4% of the value of her holding and under £3,000, so the sale is small. There is no disposal and her pool cost falls from £6,000 to £5,600.

What mistakes come up most often?

Treating bonus shares as acquired on the issue date at nil cost instead of as part of the original holding.
Forgetting to add the rights issue subscription to the pool cost, which overstates the gain later.
Treating the sale of rights nil paid as a disposal of separate rights with nil cost, instead of a capital distribution from the original shares.
Ignoring small cash payments for fractions and lapsed rights, which still reduce the pool cost.
Treating excess shares taken up in an open offer as part of the reorganisation.
Splitting cost between different classes using the wrong valuation date for quoted and unquoted shares.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.