CG45550 - Group share exchanges: interaction with the no gain/no loss rule

TCGA92/S171 (3)

The rules described here apply to share exchanges that happen on or after 15 March 1988.  The guidance applying to exchanges before that date was archived in January 2021 and can be found at pages CG45551 to 45573 in versions of the capital gains manual saved in the National Archives before then.

Summary

This rule ensures that the share reorganisation provisions take priority over the no gain/no loss rule when there is a share reorganisation within a group of companies.

Background

The share reorganisation rules are described at CG52521+.  In short: where the shareholders in Company Y exchange those shares for an issue of shares or securities in Company Z then the shareholders are  treated as not making a disposal of their shares, but their shares in Y and Z are treated as a single asset.  This means that no tax liability arises on a “paper for paper” transaction, but the shareholders will be taxed when they finally dispose of their Z shares, which take on the original base cost of their Y shares. 

In addition, Company Z is treated as acquiring the Y shares at their market value.  TCGA92/S171(3) deals with the situation where the shareholder involved in the exchange is a company in the same capital gains group.  So where Company X exchanges its shares in Company Y for an issue of shares by Company Z, and X and Z are members of the same group. 

The effect of the rule

The rule in TCGA92/S171(3) simply means that the no gain/no loss rule for group asset transfers does not apply, with the result that Z is treated as acquiring the Y shares at their market value at the time of the exchange.

The actual legislation states that the no gain/no loss treatment “shall not apply to a transaction treated … by virtue of section 135 as not involving a disposal by company A”.  Here “company A” is the transferor referred to as such in TCGA92/S171 itself, which corresponds to Company Y in the example above. That is not the same “company A” in terms of TCGA92/S135.

Group exchanges involving the issue of QCBs

Where the exchange involves the issue of Qualifying Corporate Bonds (QCBs) in a group company rather than shares or other types of securities then the no gain/no loss rule in TCGA92/S171(1) will not apply to the transfer for a different reason.  Such exchanges are dealt with by TCGA92/S116(10) which provides that “so far as it relates to the old asset and the new asset, the relevant transaction shall be treated for the purposes of this Act as not involving any disposal of the old asset...”. The no gain/no loss rule does not apply unless there is the disposal of an asset.

General guidance on exchanges involving the issue of QCBs is at CG53709+.

Group exchanges involving the potential application of the Substantial Shareholding Exemption

CG53170 (with examples at CG53170A) provides additional guidance that should be considered where it is possible that the Substantial Shareholding Exemption (SSE) may apply to the transfer of shares between group companies that takes place as part of a reorganisation.