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HMRC internal manual

Capital Gains Manual

Debts: satisfied by issuing shares or securities: share reorganisations

TCGA92/S251 (3) operates where a creditor acquires property in satisfaction of his debt. If

  • a loan is converted into shares, and
  • the shares are issued as part of a reorganisation of the company’s share capital (TCGA92/S126 - see CG51700 onwards)

TCGA92/S127 provides that the transaction is treated as involving no acquisition of the shares issued (see CG51805) so TCGA92/S251 (3) cannot apply. If the transaction was not a bargain made at arm’s length the allowable cost of the new shares may be restricted by TCGA92/S128 (2) (see CG51840 onwards).

However, in many cases the conversion of a loan into shares is not a share reorganisation. For example, the shares may not be

  • issued to people because they were shareholders in the company, or
  • issued to the shareholders in the company in the same proportions as their previous holdings of shares in the company.

The special rules on the satisfaction of debts in TCGA92/S251 (3) will then apply. These may restrict the allowable cost of the new shares to their market value when they were issued whether the transaction was a bargain made at arm’s length or not, see CG53513.


  • Mr W lent £100,000 to RIP Ltd, but is not a shareholder in RIP Ltd.
  • Later RIP Ltd is unable to repay the loan, but offers to issue 100,000 ordinary £1 shares to Mr W at par. Mr W accepts and applies the whole of the loan due to him to pay for the shares.
  • Subsequently Mr W sells the shares for £20,000.

As the shares were not issued to Mr W because he was a shareholder, the transaction does not amount to a reorganisation of RIP Ltd’s share capital. Mr W’s chargeable gain or allowable loss on the disposal of the shares will normally be based on the market value of the shares when they were issued, not their £100,000 nominal value. However, any gain on the disposal of the shares may be reduced if any loss on the disposal of the debt when the shares were issued was not allowable, see CG53513.

If the shares are unquoted you should ask Shares and Assets Valuation to agree their value when they were issued before agreeing the gains or losses arising on their disposal, see CG59560.