Dealing with takeovers

[C Law]

I am based in the UK, using Money 2005 (I think!). Recently Direct Line was taken over by Aviva. The result of this gave 0.2867 aviva shares and £1.297 in cash for every Direct Line share. How should I enter the action?

[Cal Learner]

I am trying to think of how I have handled this in the past... A split and rename is one way I tend to do in a tax-deferred account. Change the symbol and name in the Investment Details. Then do a return  of cash transaction to account for the cash.

The other way would be to enter a Demerger (spinoff) with Aviva taking 100% of the basis.  I am not sure how well that would work for you, so keep an extra copy/backup of your file in case you want to undo the operation. Again, maybe a ROC transaction to account for the cash.

I don't know how this is treated tax-wise. If I knew that, I might suggest a method that better reflects that. A ROC transaction reduces basis, but does not expect a taxable event.

[Bill Hackney]

I'm also based in the UK.

An important part of what you want to do is to get it right for tax purposes on Money.  The Scheme Document for Aviva's takeover of Direct Line has a whole section on taxation.  It says on page 72:

"A UK Holder’s base cost in their Scheme Shares should be apportioned between the share and cash elements of the consideration received by that UK Holder by reference to the respective market values of the New Aviva Shares and cash received by them under the Scheme as at the time of the disposal. To the extent that a UK Holder receives at least one New Aviva Share in exchange for Scheme Shares, the exchange should be treated as a reorganisation for the purposes of UK taxation of chargeable gains. This means that to the extent that a UK Holder receives at least one New Aviva Share in exchange for their Scheme Shares and that UK Holder does not hold (either alone or together with persons connected with them) more than 5 percent of Direct Line Shares, that UK Holder should not, subject to the following 72 paragraphs, be treated as having made a disposal of their Scheme Shares for the purposes of UK taxation of chargeable gains. Instead, the New Aviva Shares should be treated as the same asset as those Scheme Shares, and as acquired at the same time and for the same consideration as the relevant Scheme Shares. See above regarding the base cost allocation."

So, you need to ensure that part of the tax base cost of your Direct Line shares is allocated to the Aviva shares, and the remainder is allocated to the cash you received.  Hence in the current tax year, you will have realised a partial gain (or loss) for CGT purpose, in respect of the element received in cash

If you hold your shares through a brokerage account, frequently the broker will do the calculations for you.

As Aviva already existed as a listed company (did you already hold previously acquired shares in Aviva, on Money?), in Money I wouldn't treat this as demerger, because the demerger functionality isn't very good at dealing with the cash receipt.

I don't know the numbers, but let's say that you had to allocate 70% of the tax base cost of the Direct Line shares to the Aviva shares that you received, and the remaining 30% to the cash that you received.  And let's say you originally held 1,000 Direct Line shares.

In Money, I would initially process a Sale transaction for 30% (300) of the Direct Line shares, with sale proceeds equivalent to the amount of cash your received (at £1.297 per share).  That will reduce the book cost of the remaining 700 shares to 70% of the original book cost, and also create a disposal transaction in Money that shows the correct capital gain.  You could add a Memo to the Sale transaction in Money to say that it wasn't a real sale of shares, but a disposal to reflect the cash portion of the offer.

Then I would be tempted to use the Remove Shares function to remove the remaining 700 Direct Line shares (making a note of what book cost they then had), and the Add Shares function to add the 286 Aviva shares received, using the cost of the 700 Direct Line shares that you removed as the cost of those Aviva shares.  I think I'm correct that the Remove and Add functions don't create a taxable transaction in Money (and this part isn't a taxable transaction in real life) that would come out in Money's tax reports, so that approach won't screw up any additional tax reporting that you might get out of Money at the end of the tax year.

Note that the Add Shares transaction will have a current date for when the shares were acquired but, per what I have pasted above, those shares should be considered as having been acquired when the Direct Line shares were originally purchased, for tax purposes.

Given that we no longer have indexation, the fact that the Aviva shares will show as recently acquired shouldn't be a problem from a tax reporting perspective... unless you are a day trader and you are using Money to track short term trading gains and need to separate them from longer term investment gains!

When using at the Add Shares and Remove Shares function, I use the Memo field to add supplementary information e.g. that the Direct Line shares were removed because of the Aviva acquisition.

Hope that helps.

Bill

[Cal Learner]

Bill, with your example, suppose you do a demerger with 70% of the basis passing to Aviva shares. Then sell the  Direct Line for the amount of the cash. 

[Bill Hackney]

Thanks Cal.  Yes, I guess that's a hack that gets to the same result.  In practice Aviva have acquired only some of the Direct Line shares for cash (that is the Sale transaction, in my method), not all of them, and then used their paper (Aviva shares) to buy the remainder.  There's also one other wrinkle that often happens in these sorts of transactions, which is that applying the 0.2867 factor in my example results in 286.7 shares and, because Aviva wouldn't issue a 0.7 share fraction, you have to figure out what happens to it.  The documentation would show whether that element of the consideration would simply be forfeited, or whether there would also be some additional cash from Aviva to pay for the fraction.  Of course Money allows for the fraction to be created and then dealt with, when using the Demerger option, but using Remove Shares and Add Shares also leaves open the ability to have an additional Sale transaction for the 0.7 fraction, if there is indeed a further receipt of cash for that.