CG57101 - The legacy of close company apportionment for CGT

Background

“Close company apportionment” applied for company accounting periods which began before 31 March 1989. This provided for the undistributed income of a close company to be apportioned, or notionally distributed, amongst its shareholders. This could give shareholders a higher rate income tax liability on income they did not actually receive.

Although the income tax rules were repealed over 30 years ago the rule that deals with the CGT consequences in TCGA92/S124 was retained and even now it is theoretically possible for the past income tax treatment to affect the CGT computation on a disposal of the shares in the company.

The relief

The main effect is to allow the amount of income tax paid by a person as a deduction when calculating a gain on the subsequent disposal of the shares in the close company. TCGA92/S124(1).

No deduction is due for income tax paid that has been relieved against –

  • apportioned income that was later distributed. TCGA92/S124(2), or
  • distributions in a liquidation (the obsolete Extra-Statutory Concesion A36).

Order of relief

Where only part of a holding of shares of the same class which was the subject of an apportionment is sold then the deduction should be allowed against the shares disposed of first, rather than spread across the cost of the entire holding.

Where income tax was charged at different rates of tax the relief should be given first for tax at the highest rate, TCGA92/S124(3).

Trustees and personal representatives

Where shares are held by trustees of a settlement or the personal representatives of a deceased person the income would have been apportioned to the beneficiary(ies) of the trust or estate. Strictly, relief under TCGA92/S124 is only available on a disposal by the person who actually paid the income tax but Extra-Statutory Concession D12 allowed the relief where –

  • income has been apportioned to either a beneficiary of the trust of a residuary beneficiary of the estate, and
  • the tax on that income has been borne by the beneficiary, and
  • the disposal of the shares in question is made by the trustees of the settlement or the personal representatives.