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HMRC internal manual

Capital Gains Manual

Substantial shareholdings exemption: the exemptions available - the subsidiary exemption for assets related to shares


Paragraph 2 Schedule 7AC TCGA 1992 contains the first subsidiary exemption. It provides that a gain accruing to a company (company A) on a disposal of an ‘asset related to shares’ in another company (company B) is not a chargeable gain if

  • either company A or another company in its group (CG53006 explains what is a group for the purposes of the substantial shareholdings legislation) holds shares or an interest in shares in company B immediately before the disposal, and
  • any gain on a disposal of those shares at that time by company A (assuming it held shares if the shares are actually held by another member of its group) would be exempted by the main exemption (see CG53155).

If a company is in liquidation its assets will be vested in the liquidator. In order that the first condition may be met in those circumstances, sub-paragraph (4) provides that assets vested in a liquidator are, for the purposes of paragraph 2, treated as if they were still held by the company in question.

However, this subsidiary exemption does not apply

  • in the circumstances specified in paragraph 5 Schedule 7AC TCGA 1992 (see CG53175 onwards), or
  • in the cases specified in paragraph 6 Schedule 7AC TCGA 1992 (see CG53190).

What constitutes an ‘asset related to shares’ is explained at CG53010. The main reason for specifically bringing such assets into the scope of the exemption is to avoid giving companies the choice of alternative outcomes in tax terms. Without such a provision a company holding a substantial shareholding in another company could acquire, say, convertible securities issued by the second company. If the underlying shares were standing at a gain when the first company came to sell them it could exercise its right to convert the securities into shares, sell the shares and realise an exempt gain. However, if the underlying shares were standing at a loss the company could simply sell the securities. Unless the securities were brought within the exemption regime the loss on their disposal would be allowable.