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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Share exchange: anti-avoidance: TCGA92/S137

TCGA92/S137

The anti-avoidance provisions of TCGA92/S137 apply to both TCGA92/S135 and TCGA92/S136. In practice transactions involving Section 135 are much more common. Therefore, the main description of the anti-avoidance provisions will be given in terms of Section 135. Section 137 will only apply to Section 135 or Section 136 if the exchange, reconstruction or amalgamation occurred after 19 April 1977.

All decisions on whether TCGA92/S137 (1) operates to prevent TCGA92/S135 from applying are taken in Capital Gains Technical Group. You should not express an opinion on the possible operation of Section 137 without instructions from Capital Gains Technical Group.

TCGA92/S137 (1) provides TCGA92/S135 will not apply unless the share exchange

  • is effected for bona fide commercial reasons and
  • does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to Capital Gains Tax or Corporation Tax (this means Corporation Tax on chargeable gains).

The anti-avoidance provisions do not apply if the taxpayer, either alone or with connected persons, only holds five per cent or less of, or of any class of, the issued share capital or debentures in the company being taken over. If, on or after 1 December 2003, that company holds some of its shares in treasury those shares don’t count as issued share capital when it comes to the calculation (see CG50287). You apply the test in TCGA92/S137 (2) to any holding of shares or debentures, and not merely those shares or debentures which are being acquired. Therefore, a taxpayer cannot claim the protection of Section 137(2) when selling a five per cent holding of ordinary shares if he or she also holds 10 per cent of the company’s debentures.

TCGA92/S137 (1) is not a general Capital Gains Tax anti-avoidance provision. It is very specifically targeted at the share exchange. The only effect of Section 137 is to prevent TCGA92/S135 from applying. Section 137 will be ineffective against any other Capital Gains Tax avoidance included in the transaction.