GEC could be forced to abandon its share buy-back programme if the Inland Revenue decides the ‘tax-efficient’ scheme undermines share income taxation.
GEC last month cut its gross dividend from 13.15p to 11.43p and plans to make up the difference with a #358m share buy-back. Finance director John Mayo revealed a bonus issue of ‘put warrants’ shareholders can sell or exercise on the basis of one for every 50 shares held.
Warrants not taken up will be auctioned. The proceeds are expected to be #1.50, or 3p per share.
Unlike dividends, the sale proceeds will, for some private shareholders, fall under the capital gains tax regime. If the amount is less than 5% or #3,000, ‘it should not normally give rise to a disposal for CGT purposes’.
Capital gains would be deferred until the rest of the holding is sold, said scheme deviser Warburg Dillon Read.
Tax experts said it was like ‘selling a part of the dividend’ and the benefit arose ‘because of the arbitrage effect between individual shareholders and the institutions’.
One said: ‘It makes more sense for institutions to buy and exercise the warrants than private shareholders because proceeds from the buy-back itself are taxed as dividends, with many private individuals being taxed at 40%. If the Revenue lets it go this year, it is bound to clamp down on it before GEC does it again.’
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