Takeovers, mergers and share reorganisations: what happens to your shares

When a company you own shares in is taken over, the first thing to know is that you usually have no choice about whether to sell. Under the most common route, a scheme of arrangement, the buyer ends up with 100% of the shares in issue, regardless of whether you voted in favour or not, and you receive payment in shares, cash or a combination of both¹. The vote that decides it needs shareholders holding at least 75% of the issued shares to vote in favour¹.

What you are paid matters more than the vote, because it decides your tax position. Cash is a disposal, and any profit above your £3,000 allowance may be taxable². New shares in the buyer are not a disposal, so there is normally no Capital Gains Tax until you sell them. Loan notes sit in between, and whether they qualify as Qualifying Corporate Bonds changes the answer.

This page sets out how each route works, what you receive, how your cost base is worked out, and how rights issues, bonus issues and stock dividends are treated.

Schemes of arrangement: a 75% vote decides for every shareholder

A scheme of arrangement is the mechanism most UK takeovers use. Shareholders holding at least 75% of the issued shares must vote in favour, and if that threshold is met the bidder or buying company obtains 100% of the shares in issue, regardless of whether a shareholder voted in favour or not, and the shareholders receive payment in shares, cash, or a combination of both¹.

The practical effect is that a minority holding cannot block the deal. If you voted against and the scheme passes, your shares transfer anyway and you receive whatever the offer provides. The 75% is measured by shares, not by headcount, so a large institutional holder carries more weight than a crowd of small investors.

Schemes are not the only route. A contractual offer works differently, and there is a separate compulsory acquisition process that can be used to buy out remaining holders. That process is covered in more detail in Can you be forced to sell your shares?.

One point of confusion worth clearing up: a scheme of arrangement for policyholders is a different legal process that shares the name. It is used when an insurer transfers its business, is approved by the court and by policyholders rather than by shareholders, and it changes who your policy is with rather than who owns your shares.

What you receive in a takeover: cash, new shares or loan notes

The offer document sets out what you get, and there are three broad shapes.

Cash. The simplest. Your shares are sold and you receive money. This is a disposal for Capital Gains Tax purposes, and the gain is the difference between what you receive and what the shares cost you.

New shares in the buyer. Your old shares are exchanged for shares in the acquiring company. This is not treated as a disposal, so no Capital Gains Tax arises at the point of exchange. Your original cost carries over to the new holding.

Loan notes. The buyer issues IOUs instead of paying cash, often to let shareholders defer a tax charge. If the loan notes qualify as Qualifying Corporate Bonds, gains on them are exempt from Capital Gains Tax, though the interest they pay is taxed as income. Whether a particular loan note qualifies depends on its terms, so the offer paperwork is the place to check.

Many offers are a mix: part cash, part shares. In that case the cash element is a part disposal and the share element is not.

Where shares are held in an employee Share Incentive Plan, a takeover usually means the old company shares are exchanged for new company shares and the income tax reliefs continue. If the new company wants to make awards of shares after the takeover it will need to set up a new plan⁵.

Paid in shares only: no Capital Gains Tax until you sell

If you receive only new shares, there is normally no Capital Gains Tax at the point of the takeover. The charge arises when you eventually sell.

For shares that came out of an employee Share Incentive Plan, your cost for capital gains purposes will be their market value on the date the shares leave the plan³. For free or cheap shares acquired outside an approved scheme and not by exercising a share option, the capital gains cost is generally their market value at the date you acquire them³.

Once you hold shares in the same company, they are pooled. Shares of the same class in the same company are pooled and treated as acquired at their average price, which is called a Section 104 holding⁶. That pooling rule is what makes the arithmetic manageable when you have bought the same share at different times and prices.

There is a trap for anyone thinking of selling and buying back. Shares you buy within 30 days following the day of disposal are matched against the shares sold, under the bed and breakfasting rule⁶. That prevents a same-week round trip from resetting your cost base.

If you are not UK resident, the position is different again: you do not normally pay tax when you sell an asset, apart from on UK property or land⁷.

Cash in a takeover: the £3,000 or 5% threshold

Cash is the route that most often creates a tax bill, and the figure that matters is the annual allowance. Capital Gains Tax applies to profits from the sale of investments above £3,000².

That allowance is per person, not per holding, and it covers all your chargeable gains in the tax year, not just the takeover. If the gain on your takeover cash is below £3,000, and you have no other gains, there is normally nothing to pay. If it is above, the excess is taxable at the rate that applies to your circumstances.

The gain is not the whole cash sum. It is the cash you receive minus your allowable cost, which for pooled shares is the average price of the Section 104 holding⁶. That is why records matter: without a record of what you originally paid, working out the gain is guesswork.

Two other points bear on the calculation. First, if you inherited the shares, Capital Gains Tax applies when you sell anything you inherited, and the value at inheritance normally sets the starting point⁸. Second, if the shares were held in an ISA, dividends and returns on shares and bonds held in an ISA are tax-free, so a takeover inside an ISA does not create a Capital Gains Tax charge².

Share reorganisations, bonus issues and rights issues

A reorganisation changes the shape of your holding without you buying or selling. A bonus issue gives you extra shares for nothing. A rights issue offers you the chance to buy more, usually at a discount to the market price.

In a rights issue, shareholders are given the option to purchase additional shares at a discounted price, and not taking up the rights means no shares are lost but the holding becomes more diluted⁹. There are four options: take up rights, sell rights to another investor, take up a part of the rights, or take no action⁴.

Selling the rights is a disposal for Capital Gains Tax, and the cash you receive is the proceeds. Taking up the rights means you pay for new shares, and your cost base grows by what you paid. Doing nothing costs you nothing in cash but dilutes your percentage holding.

Where a reorganisation creates shares of a different class, the treatment changes. Shares subject to restrictions on disposal are treated as a separate class of shares from any other shares in the company that you hold until the restrictions are removed¹⁰. Shares of the same class in the same company acquired on the same day are normally pooled¹⁰.

Some fund structures use a similar mechanism. With C shares, the shares and proceeds are held in a separate pool and invested, and after a certain period, or when the pool of new money is fully invested, the two portfolios are merged and the C shares are exchanged for ordinary shares¹¹.

Stock dividends are taxed as income

A stock dividend pays you in shares rather than cash. It is still income for tax purposes, and the rules depend on where the shares sit.

For Dividend Shares bought with dividends inside a Share Incentive Plan, you will not have to pay income tax on these reinvested dividends as long as the shares you buy with your dividends are held in the plan for at least 3 years⁵. If they cease to be subject to the plan within 3 years of their purchase, you will be chargeable to tax¹⁰. When that happens, the amount of the dividend used to buy the shares should be included in box 4 in the dividend boxes on page TR 3 of your tax return for the year the shares cease being part of the plan¹⁰.

The plan rules on withdrawal are not all aligned. Free shares and matching shares taken out after 5 years carry no Income Tax or National Insurance contributions⁵, while shares taken out during 3 years to 5 years attract Income Tax and National Insurance contributions on the lower of the pay used to buy the shares or the market value when taken out⁵. The documents do not resolve every combination, so the plan's own booklet is the place to check your specific case.

Outside a plan, a stock dividend is generally treated as income at the value of the shares received, and the shares then have their own cost base for Capital Gains Tax when you sell.

Where to get help

If a takeover, rights issue or reorganisation leaves you unsure what you have been given or what it is worth, the first stop is your platform or registrar, which holds the record of your holding and the corporate action. The pages on dividends, corporate actions and voting when you invest through a platform and how investments are taxed cover the surrounding mechanics.

If you think a firm has handled a corporate action incorrectly, the Financial Ombudsman Service can look at complaints about financial businesses. MoneyHelper offers free, impartial guidance on tax and investment questions. For tax questions specific to your circumstances, HMRC or a tax adviser is the route.