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When Spain’s Telefonica made a 200p a share offer to buy UK mobile operator O2, it was offering to pay a 22% premium to the share price.
That sounded great at the time, but now that the deal is confirmed, things are a bit more confusing.
Telefonica is offering two options to investors. They can either sell their shares direct to the firm when the deal completes (which is expected to happen in Janaury 2006), or they can take a “loan note alternative”, which allows them to sell their shares to Telefonica over a period of time. The latter is designed to help prevent investors being caught by a sudden, unexpected capital gains tax bill by using up all their tax-free allowance in one go. The notes must be redeemed in multiples of £1,000 over the relevant years, but interest (which will be taxed as income) will be paid on them, so that investors do not lose out by not having the money immediately.
So what’s the right thing to do? The answer depends on your tax situation: if you need to manage your capital gains liability, the loan option is a good one. But if your profits from the investment (now valued at 200p) are within your £8,500 CGT limit and you haven’t any other gains to take into account, there’s no reason not to bank your profits now.
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Annunziata Rees-Mogg
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