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Shareholders may face big CGT charges

Financial Times: Shareholders may face big CGT charges

Posted 4 June 05

By Robert Budden

The planned unification into a single parent company of shares in Shell Transport & Trading and Royal Dutch Petroleum, the London and Netherlands arms of the global oil group, is raising concerns with some UK investors.

Under the scheme being put to shareholders later this month, UK holders of Royal Dutch shares who accept shares in the new unified Royal Dutch Shell will be treated as if they had sold their shares, potentially giving rise to a CGT charge.

The Association of Private Client Investment Managers and Stockbrokers, a trade association representing the UK’s retail client stockbrokers, estimates that around 2,000 UK investors holding shares worth around £80m will be affected.

In one specific case, a 70-year-old woman owning shares in Royal Dutch worth around £372,400 faces a CGT bill of £192,000, according to Apcims. The woman has held 11,300 Royal Dutch shares for 35 years.

Angela Knight, chief executive of Apcims, has been campaigning for investors in Royal Dutch shares to be offered a loan note alternative which would give them much greater flexibility in avoiding CGT. Loan notes are a form of interest paying debt security with set maturity dates which trade very much like corporate bonds.

They are often offered as an alternative to investors in takeovers or other restructurings as they allow them to spread any gain over a number of years, enabling them to make use of their annual CGT exemptions and hence either avoid or reduce a CGT bill. In the current tax year, the annual CGT exemption is £8,500.

Loan notes have been used in many transactions in the past including the takeover by French building materials group Lafarge of Blue Circle, the British cement manufacturer, and Lloyds Bank’s takeover of Scottish Widows.

UK investors in Royal Dutch shares are worse off than their Dutch and US counterparts as the tax laws in these jurisdictions permit tax-free rollovers. But Apcims believes Shell should explore other options such as loan notes so that investors can minimise CGT charges.

“Apcims members are telling us that many of their clients have been holding Royal Dutch shares for decades and now get an enormous Capital Gains Tax bill as a result of this restructure – the only shareholders to be hit in this way,” says Angela Knight, chief executive of Apcims. “This is totally unfair.

“I have spoken to Shell and urged them to contact the Inland Revenue to seek an exemption from CGT for the UK shareholders. At the very least they should issue loan notes to shareholders.”

Shell indicated yesterday that it was too late to make any changes. In a formal statement the company said: “It is a share-for-share transaction. The listing particulars and offer document have been made and it is unlikely we will be able to change it now. We are responding to shareholders who contact us, but shareholders are encouraged to seek their own tax advice.”

Under the scheme, there will be a shareholder meeting to approve the unification plans on June 28. The unification is expected to become effective on July 20 with trading in Royal Dutch Shell shares and American Depositary receipts commencing on the same day.

“Most of the more exotic CGT avoidance schemes have disappeared with the Chancellor’s crack down on avoidance,” says Mike Warburton, senior tax partner at accountants Grant Thornton.

One route would be to gift any shares to charity as this would annul a CGT bill.

Where the shares are held in one person’s name, Warburton advises transferring shares to a spouse so they can also use their annual CGT exemption. If shares have been held for a few years, the CGT bill can be cut further under the “non business assets taper relief” regime, which can be transferred between spouses.

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