CG53719 - Shares and securities: qualifying corporate bonds: interaction of qualifying corporate bond legislation with other sections of TCGA 1992
No gain, no loss transfers
Certain sections of the TCGA provide that for some disposals the consideration received by the vendor is fixed at a sum which will ensure that neither a gain nor a loss will accrue to the vendor. The assets transferred may include qualifying corporate bonds (QCBs). The disposal of the QCBs may trigger a deferred gain because of TCGA 1992 Section 116(10). Section 116(11) provides that for the following types of no gain no loss transfers that will not happen.
TCGA1992/S58(1) - spouses or civil partners of each other
TCGA1992/S62 (4) - disposals by personal representatives to legatees
TCGA1992/S139 - company reconstructions involving the transfer of a business
TCGA1992/S140A - transfer of a UK trade
TCGA 1992/S140E - merger leaving assets in the UK
TCGA 1992/S171(1) - disposals within a group of companies
Under section 116(11) where any disposal under the ‘no gain no loss’ sections mentioned above includes QCBs and the disposal of these would otherwise trigger a deferred gain under section 116(10)(b) then section 116(10)(b) will not apply at that time. Instead section 116(11) provides for a ‘stand in shoes’ rule whereby the acquirer of the QCBs to which the no gain no loss rule applies is treated as being the person to whom section 116(10) originally applied.
Example
On 1 January 2015 Tom exchanged his ordinary shares in company A for QCBs in company B. Section 116 applied and in accordance with subsection 10(a) the latent gain on the shares was computed. On 1 January 2019 Tom disposed of his QCBs to his husband Simon. Section 58 applied so that neither a gain nor a loss accrued to Tom. Under section 116(11) the deferred gain does not accrue at that time. For the purposes of sections 116(10)(b) & (c) Simon is treated as having acquired the QCBs, the new asset, for the same consideration and at the same time the QCBs were acquired by Tom. When Simon disposes of the QCBs then the deferred gain under section 116(10)(b) will be chargeable on Simon.
Lloyd's Underwriters
Special rules exist for dealing with gains that accrue to members of a Lloyd’s syndicate. CG20750 explains which offices deal with Lloyd’s underwriters.
Syndicate assets may include securities which may be qualifying corporate bonds. It is only gains that accrue on the disposal of assets held in Personal Funds (Ancillary funds) which can be assessable gains under the TCGA on the member of a syndicate. Gains in other funds are chargeable as income. Note that assets held by a person in a capacity other than a member of a syndicate are subject to the normal rules within the TCGA.
Substantial shareholding exemption
Under TCGA 1992 Sch 7AC gains on the disposal of a substantial shareholding by a corporate entity may be exempt from the charge to tax on capital gains. Under paragraph 4(1) to establish whether there is a disposal on which a corporate shareholder would qualify for the exemption the non disposal rules in sections 127 and 116(10) are deemed not to apply, i.e. they are temporarily disregarded. If the conditions in Sch 7AC are met so that the exemption will apply then paragraph 4(3)(a) provides that sections 116(10) and 127 will not apply, i.e. they are permanently disregarded. CG53000+ provides fuller details of Sch 7AC.
Gifts
An individual might make a claim for a relief under TCGA 1992 section 165 for the gift of business assets. The general effect of section 165, as provided by section 165(4), is that a gain will not accrue to the transferor at the time of the transfer. The transfer may include QCBs but if the QCBs constitute a ‘new asset’ as defined in section 116, see CG53709, then under section 165 any deferred gain within section 116(10) will not accrue at the time of the transfer. Furthermore the QCBs will not be a ‘new asset’ for the transferee which would mean that the deferred gain under section 116(10) would never come into charge. Section 165(3)(c) overcomes this by disapplying section 165(4) so that the deferred gain under section 116(10)(b) comes into charge at the time of the disposal for which a claim is made under section 165.
Charities
The exemption for gifts to charities in TCGA 1992 section 257, see CG66620+, also applies to a gift of QCBs which carry a deferred gain. The deferred gain is not brought into charge on the disposal to the charity.
IHT
FA 1989 introduced a new holdover relief for certain gifts subject to Inheritance Tax, TCGA 1992 section 260. Under section 260(6) it is not possible to claim this relief on the gift of a QCB which carries a gain deferred under section 116(10)(b).
Death and personal representatives
As a general rule the death of a taxpayer is not an occasion of charge for capital gains purposes, TCGA 1992 section 62, see CG30200C. When the taxpayer dies the assets he or she was competent to dispose of will pass to his or her personal representatives, but section 62(1)(b) provides that this is not treated as a disposal. However, this does not mean the personal representatives inherit any deferred gain. QCBs acquired by the personal representatives are not “the new asset” in their hands under section 116(4) and a deferred gain will not accrue when they dispose of the QCBs either by distribution to the beneficiaries or by sale or redemption for cash. The gain deferred under section 116(10)(b) is ‘lost’.
The situation is different if the personal representatives acquire shares or securities which are then converted to QCBs as a result of a relevant transaction whilst the shares or securities are still held by them, so that the gain latent in the shares or securities is deferred until the disposal of the QCBs. Then the deferred gain will accrue in the normal way if the personal representatives sell or redeem the QCBs. However, there will not be a charge if they distribute the QCBs to the legatees. A distribution by the personal representatives to the legatees of an estate is a transaction to which section 62(4) applies. Section 62(4) is one of the specific provisions referred to in TCGA92/S116(11) as not triggering the release of the accrued gain. Instead any liability on the deferred gain will pass to the legatees who receive the QCBs: the gain will accrue in the normal way under section 116(10)(b) when they dispose of the QCBs. See CG53710.
Business Asset Disposal Relief
FA 2008 introduced Entrepreneurs’ Relief, now named Business Asset Disposal Relief. Although gains that accrue on the disposal of qualifying corporate bonds are not chargeable gains nevertheless such a disposal may trigger a gain that has been deferred under TCGA 1992 section 116(10). The legislation for Business Asset Disposal Relief (TCGA 1992 sections 169H - 169S) contains specific rules for gains that are deferred under section 116(10). The original rules apply from 6 April 2008 to 22 June 2010, CG64160 provides full details. F(No2)A 2010 changed those rules for relevant transactions occurring on or after 23 June 2010. CG64161 provides full details.
Identification
The share identification rules in TCGA 1992 refer at particular sections to relevant securities. The definition of relevant securities is provided by TCGA 1992 section 108(1) and includes qualifying corporate bonds (QCBs).
Section 104(3) provides that sections 104, 105, 107 & 110 do not apply to relevant securities. Therefore these sections do not apply to QCBs.
Section 107 provides general rules on the identification of securities for corporation tax so a disposal of QCBs by a company is not subject to the share identification rules.
Specific rules do exist for non corporate holders of QCBs and they are contained within section 106A. Appendix 10 of the CG guidance manual provides fuller details on the operation of section 106A. Note: There are no analogous rules similar to section 106A for corporate holders of QCBs.
See CG50500+ for a fuller explanation of the rules relating to share identification.
Milk marketing boards
See CG52850+ concerning free loan stock issued on the reorganisation of the milk marketing boards.