The trouble with getting your cash back

Giving money back to shareholders sounds a simple enough thing: surely companies can just send out a cheque in the same way as a dividend payment? In fact, the procedure is usually much more complicated - as the proposals from National Grid Transco show.

It is returning £2 billion of the £5.8 billion proceeds from selling four of its eight gas distribution networks to shareholders, roughly equal to 65p a share. It could simply have paid this as a special dividend but, for many investors, dividends are not particularly tax efficient, so it has chosen a so-called B share scheme to offer investors a choice of how, and when, they pay tax on the distribution.

Such schemes are becoming more common: Sainsbury, for example, used one when it gave back some of the proceeds of its Shaw's supermarket business last year.

With NGT's scheme, investors are given three options: they can take the 65p as a dividend share; they can take the share and immediately sell it to the company's broker for 65p, free of dealing costs and commissions; or they can keep the share until one of two future repurchase dates, expected to be in August 2006 and 2007.

The decision on which option is best depends on investors' tax position. Higher-rate taxpayers have to pay 25 per cent tax on dividends, so anyone in that position may do better to take the share and sell it to the company's brokers. That is treated as a disposal for capital gains tax purposes. The first £8,500 of gains in any year are tax free; thereafter they are charged at your top rate of tax. So higher-rate taxpayers who have not used their capital gains allowance may be able to escape a tax bill. If you have used this year's allowance but think you may not do so over the next two years, or if you expect to fall out of the higher-income tax bracket in the next two years, it may be worth holding the shares until one of the next two repurchase dates.

The calculations will be complicated: for example, the base cost of your shares will have to be adjusted for the return of capital, and it is certainly worth taking professional advice, particularly if you have a large holding.

Like many other companies, NGT is accompanying its B share scheme with a share consolidation to avoid the price falling after the 65p is returned. For every 49 shares you now hold, you will get 43 new ordinary shares. One reader complains that this reduction in his holding and issue of B shares leaves him in exactly the same position as he was, except that some of his investment will have turned to cash, and says that does not seem much of a perk for investors. These complaints miss the point of the scheme, which is not to create value for shareholders per se but to make sure that the company operates with the most efficient capital base.

The money already belonged to investors, but it was held in the company rather than investors' own bank accounts. NGT, like Sainsbury, Centrica, Marks and Spencer and others which have carried out such schemes, has no immediate use for the funds and simply putting it on deposit or using it to pay off relatively inexpensive debt would not generate a high return.

Shareholders, however, should be able to use that cash more efficiently - even if they use it to buy more NGT shares they will get a 4.5 per cent yield - and, hopefully, the prospect that their shares will gradually increase in value. Its shares have done well over the last year, gaining more than 30 per cent compared with the low of 427.25p for the year, but it has still lagged other utilities.

Jane Coffey, head of equities at Royal London Asset Management, says the cash return and consolidation means the company remains attractive for those looking for either income or capital growth. She adds: 'We have been increasing our position in the company recently after it has significantly underperformed the rest of the utility sector.'