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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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Group share exchanges: Westcott v Woolcombers Ltd

The practical impact of the Woolcombers decision was that a share exchange could effectively duplicate gains or losses at different tiers in the new group structure, depending on whether the shares transferred on the share exchange had a market value greater or less than their capital gains cost.

EXAMPLEThis example ignores indexation.

  A   A  
  :   :  
  : cost £ 0.08M : Cost £0.08M
  : Market value £1.2M : Market value £1.2M
  :   :  
  B   C  
      : Cost £0.08M
      : Market value £1.2M

On a share exchange before 15 March 1988 company A transfers to group company C shares in group company B with original cost £0.8M and market value £1.2M. It is assumed that before the share exchange company C is a shell subsidiary with negligible assets, and that the anti-avoidance provisions do not prevent roll-over treatment. The effect of the roll- over rule is that the capital gains cost £0.8M of A’s shares in B becomes (part of) the capital gains cost of A’s shares in C. The effect of the no gain/no loss rule, applied in accordance with the Woolcombers decision, is that C’s shares in B also have a capital gains cost £0.8M. Since C has no assets other than its shareholding in B then the market value of A’s shares in C is the same as the market value of C’s shares in B, that is £1.2M.

Before the share exchange there was a latent gain £0.4M at a single tier (A/B). After the share exchange there can be a latent gain £0.4M at two different tiers (A/C and C/B).

In the converse case where the shares transferred on the share exchange had a market value £0.8M but original cost £1.2M the broad effect of Woolcombers was to duplicate a latent loss £0.4M at two different tiers.