Introduction to Aviva Preference Shares

Aviva, a leading UK insurer, has been in the spotlight recently due to its plans to cancel preference shares. Preference shares are a type of equity that offers a fixed dividend and are typically favored by investors seeking predictable income. However, the cancellation of these shares has raised concerns among investors and financial advisers, particularly regarding potential tax implications for retail investors.

Background on Cancellation Plans

Aviva's decision to cancel preference shares is part of a broader strategy to manage its capital structure more efficiently. The company aims to return capital to shareholders while maintaining a robust financial position. However, this move requires shareholder approval and court sanction under UK law[1][2].

Key Considerations for Cancellation:

• Shareholder Approval: The cancellation requires a 75% approval from both ordinary and preference shareholders combined.
• Court Sanction: The process must be sanctioned by the High Court of Justice in England and Wales to ensure that creditors are not prejudiced.
• Tax Implications: Advisers have flagged concerns about the potential tax hit on retail investors resulting from the cancellation.

Tax Implications for Retail Investors

Financial advisers have sounded the alarm over the potential tax consequences of Aviva's plan. When preference shares are cancelled, investors may face capital gains tax on any profits realized from the sale or redemption of these shares. This could result in an unexpected tax bill for unwary retail investors, who often do not factor in such expenses when investing in preference shares for stable income.

Key Tax Considerations:

• Capital Gains Tax: Investors may face capital gains tax on the premium paid over the nominal value of the shares.
• Tax Impact on Dividend Income: While dividends are generally taxed as income, any capital gains resulting from the cancellation might be taxed differently.
• Impact on Retirement Portfolios: For investors holding preference shares in tax-efficient retirement vehicles, the cancellation could disrupt long-term tax planning strategies.

Impact on Market Perception and Investor Trust

The cancellation of preference shares could also affect how investors perceive Aviva's relationship with its stakeholders. Exercising the right to cancel these shares at par value, even with additional compensation, might raise concerns among investors about the fairness and predictability of such moves[2].

Key Market Considerations:

• Investor Confidence: The transparency and fairness of the cancellation process are crucial to maintaining investor confidence in Aviva.
• Regulatory Compliance: Ensuring that all legal and regulatory requirements are met is vital to avoid disputes.
• Market Volatility: The impact on preference share prices and broader market volatility must be carefully assessed.

Alternatives and Mitigation Strategies

Aviva has considered various alternatives, including a tender offer and capital reduction. These strategies aim to address potential objections from investors while ensuring the company's financial goals are met[1][2].

Mitigation Strategies:

• Tender Offers: Allowing shareholders to tender their shares at a specified price can mitigate resistance.
• Premium Payments: Offering a premium above the par value can incentivize shareholders to participate.
• Communication and Transparency: Keeping investors informed about the process and its implications is crucial.

Conclusion

The cancellation of Aviva preference shares highlights the complexities involved in managing capital structures while balancing investor interests. As the process moves forward, it is essential for advisers to guide retail investors through the potential tax implications and for Aviva to maintain transparency to protect its reputation and investor trust.