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When a company builds up a reserve of capital it may decide to issue additional shares to its existing shareholders free of charge. This is called a capitalisation issue.

Example

Anna holds 1,000 £1 shares in a company with an issued capital of £100,000 in £1 shares and reserves of £250,000. The company makes a 1 for 1 capitalisation issue. It issues a £1 share, from its reserves, for every share held. After the capitalisation issue Anna has 2,000 £1 shares in a company with an issued share capital of £200,000 and reserves of £150,000.

On the first day on which dealing in the ‘new� shares begins on the stock exchange, the quotation of the ‘old� shares is adjusted to exclude the benefit of the new shares. The ‘old� shares are marked XC on the London Stock Exchange listings (IHTM18092).

• If shares are sold before the XC marking, the purchaser is entitled to the new shares.
• If they are sold after the XC marking, the original owner is entitled to the new shares.
• If the shares are marked XC at the date of death, the estate is entitled to the ‘newâ€� shares and these should be included in the account.