CG51840 - Share reorganisations: consideration paid: anti- avoidance
The shareholder may try and create an allowable loss by subscribing for new shares to replace an irrecoverable or worthless loan. This type of transaction is illustrated in the case of Dunstan v Young, Austen & Young Ltd (61TC448).
Young, Austen & Young Ltd (YAY) beneficially owned all the shares in Jones Refrigeration Ltd (Jones). It wanted to sell these shares but Jones owed £200,000 to YAY and other group companies which it could not repay. YAY subscribed for a further 200,000 £1 ordinary shares in Jones which Jones used to repay the loans. YAY sold the shares in Jones. As discussed in CG51748 the subscription for the new shares was treated as a share reorganisation. YAY claimed a deduction for the £200,000 it had paid for the shares even though it was agreed the transaction was a bargain made otherwise than at arm's length.
If a taxpayer acquires an asset otherwise than by way of a bargain made at arm's length the Capital Gains Tax base cost will be established by TCGA92/S17. The market value of the asset will be substituted for the consideration paid to acquire the asset, see CG14530+. However, Section 17 cannot apply to a reorganisation because it is treated as not involving any acquisition of the shares. In the case of Dunstan v Young, Austen & Young Ltd the company was allowed its deduction.
TCGA92/S128 (2)
This loophole was blocked for reorganisations which occur on or after 10 March 1981 by what is now the second part of TCGA92/S128 (2). The subsection only applies if the consideration for the reorganisation is given otherwise than by way of a bargain made at arm's length. This requirement means that the anti-avoidance provisions in TCGA92/S128 (2) will not apply very frequently in practice. For advice on the meaning of the phrase `bargain made otherwise than at arm's length' see CG14540+. This would not apply to normal rights issues by a quoted company. In the context of reorganisations the facts of Dunstan v Young, Austen & Young Ltd and CIR v Burmah Oil Company Ltd (54TC200) give good examples of the type of case you should be looking for.