TaxPersonal TaxBusiness – GEC share buy-back backfires

Business - GEC share buy-back backfires

A novel share buy-back scheme developed for engineering giant GEC back-fired on investors last week after huge rises and falls in stock market value of the company.

GEC first put forward the scheme in the summer amid speculation it would be the target of an Inland Revenue crackdown.

The scheme, developed by investment bank Warburg Dillon Read, involved issuing thousands of put warrants to make up for a cut in dividend.

John Mayo, finance director, unveiled the bonus issue of put warrants that shareholders could sell or exercise on the basis of one for every 50 shares.

The warrants gave investors the right to sell their GEC shares at a predetermined price of 417p. GEC shares stood at about 333p when the issue was announced.

A rise in the market pushed up the GEC share price by 10% and the value of the put warrants was cut dramatically.

When the markets slumped later the warrants’ value shot up, but most individual investors had already elected to sell on the opening day of the auction when the shares were at their peak.

Senior banking sources said an Inland Revenue probe was now unlikely.

They said the Revenue had largely given up investigating the tax implications of share-by-backs since the abolition of advanced corporation tax (ACT).

Under the put warrants scheme, profits fall under capital gains tax allowances, allowing individual investors to avoid paying top rate tax.

One banker said: ‘Under ACT, these schemes could force the Revenue to write massive cheques to the big pension funds, to claim back tax. Now ACT has gone, shifting from dividends to share-buybacks is not such an issue.’

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