Q&A

Can I offset the loss on Eircom shares bought for £2,000 (€2,541) against the gain on 900 First Active shares received free upon flotation and, if so, how do I work it out? I also have the loyalty shares that came with First Active.

First Active and Eircom

I still have the Vodafone shares that I received somewhere along the line.

Mr M.B., Dublin

You are not alone. Judging by my recent postbag, there are lots of people who owned both Eircom and First Active shares and who are totally confused about how to assess their capital gains tax liability.

It's hardly helped by the fact that neither stock had a standard existence. Between First Active's capital reduction programme and the splitting of Eircom before it was taken private by Valentia, it was hardly an exercise designed to persuade novice investors of the simplicity and transparency of stock market investment.

The first thing to note is that you can offset any loss incurred in the Eircom debacle against a gain made on the First Active shares.

Before I go into detail, I would like to note that I could have taken any number of figures mentioned in various letters to work as an example. The maths on the £2,000 will work just as easily with any other figure that was originally invested in the stock.

First off, as the stock floated at £3.07 (€3.90), the actual investment in this case would have been £1,998.57 (€2,537.66) for 651 shares in Eircom.

When the company was split up into Eircell and its fixed-line business, the Revenue determined that 43 per cent or €1.69 of that €3.90 flotation price was accounted for by the fixed-line business and 57 per cent, or €2.21, by the mobile phone business that became a part of Vodafone.

The Revenue has determined that the market value of the mobile and non-mobile sides of Eircom following the split was €1.45406 and €1.11 respectively.

When the fixed-line business was eventually sold to the Valentia consortium, Eircom investors received € 1.335 per share - an improvement on the Revenue determined value of the business at the time of the split but still well below the €1.69 that the Revenue determined the business was valued at upon flotation.

The end result is that you lost 35.5 cent for every original Eircom share you owned.

The £2,000, or more accurately the £1,998.57 (€2,537.66), you spent bought you 651 shares in Eircom. With each of them losing 35.5 cent, you lost €231.11.

Unfortunately, that is not quite the end of the issue. On the first anniversary of the flotation you received one bonus share for every 25 shares received when the company joined the stock exchange.

These bonus shares have a base value (or acquisition value for capital gains tax purposes) of zero. Thus, everything you received for these shares is a capital gain.

Having held 651 shares at flotation, you would have received 26 bonus shares. At the €1.335 Valentia takeout price, this amounts to a capital gain of €34.71.

Offsetting this against your earlier loss, your ultimate loss on Eircom is €196.40. You mention an altogether different figure from your recent phone conversation with Revenue in your letter, although you acknowledge you cannot make sense of it.

Neither can I, and I am not going to mention the figure here because it will simply confuse an answer already altogether cluttered with figures.

The First Active side of the equation is, in your case, relatively simple as you have just the free shares and the loyalty shares that subsequently were awarded on them, with no shares bought in the company.

As a result, all 990 of your First Active shares have an acquisition value of zero. Therefore, the full €6.20 price per share that you got from Royal Bank of Scotland is a capital gain. That gives you a gain of €5,580.

So your bottom line is that you have a gain of €5,580 against which you have a loss of €196.40, leaving you with an overall gain of €5,383.60. From this you take away the €1,270 capital gain you are allowed to make without paying any tax and that leaves you with a taxable gain of €4,113.60.

Taxed at 20 per cent, this will leave you with a liability of €822.72 come the deadline at the end of this month.

Of course, if you sold your Vodafone shares, the situation would change again but I have outlined the position on Vodafone in the answer below.

Vodafone losses

I read with interest the method for calculating capital gains tax on First Active shares. I understand that realising a loss on Vodafone shares may be used to reduce the charge on First Active gains.

Can you let me know what loss arises on shares currently held in Vodafone, which were originally Eircom shares?

I cannot trace back the various changes Eircom went through before becoming Vodafone.

B.C., email

The first thing to note is that, as long as you hold on to the Vodafone shares, no loss will arise on them to be offset against First Active or any other capital gain.

However, assuming you were to sell the Vodafone shares, you could then work back what the loss was.

At the time of the Eircom break-up as described in the answer above, the value on the Eircell mobile phone operation that became part of Vodafone was set at 57 per cent of the original investment of €3.90 per share, or €2.21.

However, 57 per cent of the break-up price was only €1.45406, a loss of 75.594 cent per original Eircom share.

The issue gets somewhat complicated because you only received 0.9478 of a Vodafone share for every two Eircom shares you originally held. Working out the maths, this means that you paid €4.66 for almost every Vodafone share you hold.

Almost? Well, you got one bonus share in Eircom for every 25 bought at flotation on the first anniversary of the company going public.

Thus, one-26th of your Vodafone holding cost you nothing and therefore can have no capital loss.

At its most recent price (£1.37¼ sterling at close of business on Wednesday) and at the prevailing exchange rate (£0.6903/€1), which gives a euro valuation on the Vodafone shares of 198.83 cent, you would currently be nursing a loss of 267.17 cent per Vodafone share.

Please send your queries to Dominic Coyle, Q&A, The Irish Times, D'Olier Street, Dublin 2 or e-mail to dcoyle@irish-times.ie. This column is a reader service and is not intended to replace professional advice. Due to the volume of mail, there may be a delay in answering queries. All suitable queries will be answered through the columns of the newspaper. No personal correspondence will be entered into.