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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Company reconstructions: shareholder: computations involving TCGA92/S136

The ordinary computational rules of TCGA92/S127 - TCGA92/S131 apply. If the original shares are cancelled the computation will be the same as TCGA92/S135, see CG52579. If the original shares are retained you will have to split the cost between the original shares and the new shares. The normal rule in TCGA92/S129 is that you make the apportionment by reference to the market value of the different shares at the date of disposal of any of the shares in the new holding, see the Example below. However, if either class of the new shares is quoted TCGA92/S130 will apply. You will make the apportionment by reference to market value on the first day on which the shares are quoted.

Example

  • June 2005 an individual buys 5,000 shares in Pacific Exploration Ltd at £3 per share.
  • September 2009 Pacific Exploration Ltd decides to demerge its wholly owned subsidiary Honest Endeavour Ltd. The shares in Honest Endeavour Ltd are transferred to Resolution Holdings Ltd which issues 3,000 £1 ordinary shares to the taxpayer. Neither Pacific Exploration Ltd nor Resolution Holdings Ltd are quoted, so TCGA92/S129 applies.
  • April 2011 the individual sells 2,000 shares in Resolution Holdings Ltd at £4 per share.

In April 2011 the market values of the component parts of the new holding are

Pacific Exploration Ltd £5 per share
   
Resolution Holdings Ltd £4 per share

SECTION 104 HOLDING POOL

  No. of Shares Pool of qualifying expenditure
     
Purchase - June 2005 5,000 £15,000
     
     

The proportion of the pools of qualifying expenditure and indexed expenditure attributable to the RH Ltd shares is calculated by reference to the market values of the component parts of the new holding in April 2011. This is

3,000 x £4 = 12
     
(3,000 x £4) + (5,000 x £5)   37

So the pool of qualifying expenditure attributable to the RH Ltd shares is £15,000 x 12/37 = £4,865

The computation on the part disposal of the RH Ltd shares is then as follows.

SECTION 104 HOLDING POOL

  No. of Shares Pool of qualifying expenditure
     
September 2009 Demerger 3,000 £4,865
     
     
April 2011 Disposal (see Note below) (2,000) (3,243)
  1,000 £1,622

NOTE. The calculation of the amounts deducted from the pools of qualifying expenditure is shown in the Capital Gains Tax computation below.

Capital Gains Tax computation

Using consideration received the part disposal formula becomes

             £8000                     = 8

£8,000 x (1,000 x £4)     12

Pool of qualifying expenditure £4,865 x 8/12 = £3,243  
       
       
      £
  Disposal proceeds   8,000
less Cost   3,243
    Chargeable gain 4,757

NOTE - Indexation allowance will need to be considered where the shareholder is a company.