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HMRC internal manual

Capital Gains Manual

Substantial shareholdings exemption: interpretation - asset related to shares


Paragraph 30 Schedule 7AC TCGA 1992 explains what is an ‘asset related to shares’ for the purposes of the substantial shareholdings exemption legislation. An asset is related to shares in a company if it is

  • an option to acquire or dispose of shares or an interest in shares, in that company, or
  • a security that could be converted into or exchanged for shares in that company by the exercise of rights granted to the holder of the security.

With regard to convertible or exchangeable securities, it is only rights attached to the security that relate directly or indirectly to conversion into, or exchange for, shares in the company that are considered. Moreover, a convertible or exchangeable security is not an asset related to shares if when the rights were granted there was no more than a negligible likelihood that they would be exercised eventually. So it is not possible to bring a security within the scope of the exemption by attaching some spurious or extremely remote rights to convertibility in the event of, for instance, some unlikely occurrence.

The definition of what is an asset related to shares is extended to cover securities convertible into options over shares (although on the basis of the law as it existed on 1 April 2002, such securities, if they exist, would not be within the scope of TCGA 1992) or to chains by which securities/options can be converted into other securities/options, and so on, until one or the other is convertible into shares.

Not all convertible or exchangeable securities will be assets within the scope of TCGA 1992, so as to be exempt under Schedule 7AC. All securities convertible or exchangeable into shares will be assets representing loan relationships within the meaning of Chapter 2 Part 4 FA 1996 and so treated as qualifying corporate bonds by virtue of section 117(A1) TCGA 1992, unless they fall within the narrow confines of section 92 FA 1996.

In relation to disposals after 31 March 2002, a security meeting the requirements of paragraph 30 Schedule 7AC TCGA 1992 will fall within section 92 only if:-

  • The rights attached to it are rights to acquire, not to dispose, of shares
  • The shares to be acquired are qualifying ordinary shares or mandatorily convertible preference shares There is no pre-determined cash value for the shares to be acquired
  • The asset is not a relevant discounted security or an excluded indexed security
  • There is not a “premium put” option attached to the security, under which the holder could require a person to acquire the asset for an amount which gave the holder a deep gain
  • The rights to acquire the shares, when exercised, must result in the replacement of the entire asset, subject to a small amount of cash for fractions.
  • There is no connection within the meaning of section 87 FA 1996 between the holder and the issuer (there will generally be a connection where they are in the same group for the purposes of Schedule 7AC), or if there is a connection, the security meets either of the two exceptions in section 73(6) and (7) FA 2002.

An option to acquire of dispose of shares may also be entirely outside the scope of Schedule 7AC, where it is a derivative contract falling within any of paragraphs 5 to 8 Schedule 26 FA 2002 (derivative contracts).

An option to acquire or dispose of convertible or exchangeable securities may also be entirely outside the scope of Schedule 7AC, where

  • The securities do not fall within section 92 FA 1996, or
  • it is a derivative contract falling within any of paragraphs 5 to 8 Schedule 26 FA 2002 (derivative contracts).