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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Business Expansion Scheme: share reorganisation rules (3): rights issues

The general rule

The general rule in TCGA92/S150 (9) applies if

  • there is a rights issue after 18 March 1986
  • the shares in respect of which the rights issue is made have been given BES relief and immediately after the rights issue
  • either the BES relief is not wholly withdrawn in respect of the original shares or
  • BES relief is given in respect of the allotted shares and not wholly withdrawn. If these conditions are satisfied then the share reorganisation rules of TCGA92/S127-TCGA92/S130 do not apply. Each issue of shares is treated as a separate holding. Please note this subsection does not apply if the original shares received relief under the Business Start-up Scheme.

The specific rule - rights issues before 29/11/94

TCGA92/S150(10) dealt with the specific case in which the rights issue can result in a reduction in the BES relief. Rights issues will often be made at a discount to market value. ICTA88/S305 provided that the BES relief given in respect of the original shares was reduced by the lesser of the

  • fall in value of the shares
  • excess (if any) of BES relief given and not withdrawn on the shares over the new market value of the shares.

Section 305 was amended by Finance Act 1995. The reduction was not required if the rights issue was made or the rights were sold on or after 29 November 1994.

TCGA92/S150(10) deals with the resulting Capital Gains Tax consequences if ICTA88/S305 has applied to reduce the BES relief.

  • The acquisition cost of the old shares is reduced by the amount of the relief withdrawn.
  • The acquisition cost of new shares or debentures is increased by the amount of the relief withdrawn. If different classes of shares or debentures have been issued the adjustment should be apportioned between the new shares and debentures on a just and reasonable basis.