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HMRC internal manual

Capital Gains Manual

ETMD: consequential amendments within TCGA 1992: - section 116

Where there has been a share for share exchange within TCGA 1992 section 135 then provided all of the conditions are met section 127 will apply to the shareholders of the ‘target’ company which is company A in section 135. However section 135 can also apply to exchanges involving debentures. For example company B issues qualifying corporate bonds to the shareholders in the target company, company A, in exchange for their shares in company A. Provided all of the conditions are met section 127 would in the first instance apply to provide that there was no disposal at that time and that the qualifying corporate bonds are acquired for the same consideration, and at the same time as, the original shares in the company A.

However under section 115 gains which accrue on the disposal of qualifying corporate bonds are not chargeable gains. Therefore in the above example when the chargeable person disposes of the qualifying corporate bond no gain will be charged and thus any latent gain that ‘accrued’ on the shares up to the time of the exchange would not come into charge.

TCGA 1992 section 116 provides for particular treatment for such instances. What it does is to prevent section 127 applying at the time of the exchange. Section 116 goes on to provide that despite section 127 not applying there is still deemed to be no disposal at that time but a computation should be prepared to determine any chargeable gain or allowable loss which would have arisen had there been a disposal of the old asset at the time of the exchange. That chargeable gain or allowable loss is deemed to accrue at the time of the disposal of the qualifying corporate bonds.

As mentioned at CG45732 this paragraph is only intended to provide a very general explanation on section 116. S116 can apply where section 127 to130 would apply by virtue of any provision within TCGA 1992 Chapter II Part IV. In relation to the ETMD the only impact is qualifying corporate bonds that are involved in share for share exchanges within section 135 and schemes of reconstruction within section 136. For a fuller explanation on the interaction of section 116 and reconstructions within section 135 and 136 see CG53709+.

Section 116 will have an impact on transactions involving the ETMD where transactions are those within section 140A or section 140E. For both those sections although the no gain no loss rule will apply at the asset tier nevertheless there has still been a disposal. If qualifying corporate bonds are included in the assets transferred within section 140A or E and there is a deferred charge under section 116(10) then at the time of the transfer or merger the deferred charge would, without special provision, accrue because the qualifying corporate bonds are disposed of. That would be contrary to the general principle within the ETMD, see CG45701 above. Section 116(11) solves that problem. That subsection provides that in certain instances the deferred charge under section 116(10) will not arise on certain events, for example where there has been a transfer to which section 171 would apply.

Section 116(11) was expanded to include sections 140A and E and therefore the deferred gain will not accrue at the time of the transfer of assets or merger which meets the conditions set out in those sections. Section 116(11) provides a ‘stand in shoes’ provision so that the deferred charge will accrue to the transferee company and (as for example with section 140) tax will be chargeable on the transferee company by way of section 10B, see CG42100+.