Scrip, Bonus & Capitalisation Issues

A Bonus Issue, which is sometimes referred to as "Scrip Issue" or "Capitalisation Issue", is effectively a free issue of shares - paid for by the company issuing the shares out of capital reserves. (Please note that a Scrip Issue should not be confused with a Scrip Dividend).

The general purpose of a Bonus Issue is to increase the liquidity of the company's shares in the market - by increasing the number of shares in circulation, which has the effect of reducing the share price.

The term 'Bonus Issue' is generally used to describe what is technically a capitalisation of reserves. The company, in effect, issues free shares paid for out of its accumulated profits (reserves).

For example, let us look at what happens if company ABC plc makes a 1 for 4 Bonus issue, then:

• For every four shares you own in ABC plc you will receive one additional free share i.e. you will own 5 shares of ABC plc after the issue

• The number of shares issued increases by 25%

• The share price adjusts proportionately; if the market price was 100 pence before the issue, it will adjust to 80 pence as the number of shares have increased

• The Earnings Per Share (EPS) and Dividend Per Share adjust proportionately, but the ratios remain the same

• The issued share capital increases by 25%, although this is offset by the reduction in the capital reserves.

Let us say you purchased 1000 shares in ABC plc at 100p per share. For Capital Gains tax purposes, the Bonus shares are treated as the same asset and acquired at the same time as your existing ABC plc shares. There is no immediate liability to CGT when you receive the bonus shares, but there could be a capital gains tax liability when you come to dispose of the shares. In order to determine your capital gains when you come to make a full or part disposal of your ABC plc holding, you need to adjust the base cost of your shares, reducing the cost per share as follows:

Before Bonus Issue you own:
1000 x shares ABC plc @ total cost = £1,000
Base cost per share = 100p

In this example, you receive 1 new Bonus Issue share for every 4 shares held.
If you own 1000 shares, (1000/4 = 250) then you will receive 250 new bonus shares.

After Bonus Issue:
You previously owned 1000 shares in ABC plc which you bought for £1,000. You then received 250 bonus issue ABC plc shares, at no additional cost. And so, pooling the new shares together with your original holding, you now own a total 1,250 shares in ABC plc with total combined cost of £1,000. As you can see the base cost per share is therefore reduced:

1250 x shares ABC plc @ total cost = £1,000
New base cost per share = 80p

When you make a full or part disposal of your ABC plc shares, it is the new reduced base cost that you use in your Capital Gain calculations.

Managing Scrip, Bonus & Capitalisation Issues using timetotrade
To enter a share reorganisation, follow the general instructions defined on the Share Reorganisation page. This section discusses how to enter specific details relating to Scrip, Bonus & Capitalisation Issues. For simplification a Scrip, Bonus or Capitalisation Issue is collectively referred to as a Bonus Issue when using timetotrade.

When managing Bonus Issues you are typically told the ratio of old to new shares and you will know the number of new shares you receive as a result of a Bonus Issue.

Firstly, make sure the original share purchase is listed in your timetotrade share portfolio. As you can see in the screen shot below, in this example we purchased 1000 shares in ABC plc on 1 Jan uary 2009. For the purposes of illustration only, we will assume that no commission or stamp duty was paid.

To add the bonus issue shares, click on the "share reorganisation" button as illustrated above. This will take you through to the Share Reorganisation page.

Firstly select the date that the new Bonus shares were issued. In this example, I will say that the bonus ABC plc shares were issued on 1st June 2009. Select the date from the calendar or type "1 Jun 2009" into the date field. When finished, click the "submit" button.

Next you need to identify which of the share holdings in your portfolio is subject to the share reorganisation. In this example, we would select "ABC" share holding from the drop down menu. Once you have selected, click the "submit button".

Now we need to select the type of share reorganisation. In this instance select "Bonus Issue" from the drop down menu. (You would select "Bonus Issue" for "Capitalisation Issues" and "Scrip Issues" too). Once you have selected "Bonus Issue", click on the "submit" button.

We're now nearly done. Next stage, we need to complete the fields shown below.

Symbol = ABC (in this instance the bonus shares issued were of the same type, class and use the same symbol/epic code as the existing holding. If you were issued with a different class of share or shares in a different company, you would input the epic code for new shares here instead).
Share Issue Ratio (new:old) = 1:4 (in this example we received 1 new ABC plc share for every 4 shares held in ABC plc
Shares Issued = we receved 25 new shares, so input 25 in this box
Fractional Shares = it is very rare in the UK for fractional shares to be issued, so the system defaults to "no". If you do receive fractional shares then you would change this to "yes".
Issue Price = leave this blank as this is not applicable in this instance
Cash Received = if you receive any cash as a consequence of the bonus issue, input the amount here. Any cash received will be deducted from the base cost in calculating your future capital gains on disposal.

Once finished, click on the "submit" button. You will now see a summary of the details input. Check the details are correct, and click on the blue "click here to return to ledgers" to take you back to your share portfolio page.

Returning to your share portfolio page, you can see the bonus issue transation has been added and that your "open positions" show you now own 1250 shares of ABC plc, with average purchase price of 80p per share, as expected.

The bonus issue has now been correctly accounted for within your timetotrade accounts.

Further Examples:
Lloyds Banking Group: Capitalisation Issue