HMRC has published a briefing document which will be required reading for all former Northern Rock shareholders and their agents. Following the bank’s collapse, special legislation was passed to transfer all shareholdings into the possession of the Treasury and this took place on 22 February 2008. Effectively all Northern Rock shareholders have lost their shareholdings, and the possible compensation due to them will be evaluated later this year.
The briefing document states that HMRC will consider this transfer to be a disposal for Capital Gains Tax purposes – and this will effectively mean a loss can be claimed by the former shareholder, since no consideration was received for the shares. The loss will consist, as usual, of all the allowable costs of acquisition, and can be carried forward to set against any future taxable gains if it is not set against any other gains in 2007/08. The window for claiming a loss on disposals made in 2007/08 will remain open until 31 January 2014.
Shareholders who are entitled to receive compensation may wish to treat the disposal slightly differently. The compensation, if and when it is made, will be chargeable to Capital Gains Tax as a gain, and it will arise in the tax year in which compensation is received. Where a former shareholder has not claimed a loss for the Northern Rock transfer, any allowable costs in acquiring the shares may be deducted from the compensation in order to arrive at the gain. Any taxpayer not in the self-assessment system who doesn’t expect to make any other gains over the next few years may therefore prefer to take this option, thus avoiding any unnecessary self-assessment, until the actual year in which the compensation is paid. One variable to be borne in mind when deciding when to claim the loss is the change in Capital Gains Tax rates. For gains made in 2007/08 tax is payable at 40% for higher rate taxpayers, whereas gains in the current and future years are chargeable at the new flat rate of 18%.
The briefing document also sets out the consequences for Northern Rock shareholders who shares were held under various employee share schemes, such as Save as You Earn (SAYE), Share Incentive Plans (SIPs) and Company Share Option Plans (CSOPs). In accordance with the general extinguishing of rights to acquire shares which occurred at the same time as the nationalisation process, it will no longer be possible for shareholders under these schemes to exercise the various rights they hold to acquire shares. As for actual shareholdings, this extinguishing of rights may also become a matter for compensation, to be dealt with for Capital Gains Tax purposes as explained above. The only exception to this is in the case of CSOPs, where any compensation received for the extinguishing of rights to acquire shares may be treated as an employment benefit in kind, and will therefore count as employment income in the year in which the compensation is received.