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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
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Non-resident companies: computation of TCGA92/S13 charge: example 2

Facts

  • A and B each own 50 shares
  • A and B are both resident in the UK
  • C is a loan creditor for 400,000. The loan is an arm’s length commercial transaction and interest is payable at a fully commercial rate on the loan
  • the non-resident company realises a gain of 500,000
  • the total capital of the non-resident company after the gain is 1,000,000.

Capital Gains Tax computations

You compute the TCGA92/S13 charge as follows.

Step 1

Calculate the gain that would have arisen if the non-resident company had been resident in the UK. This is 500,000.

Step 2

Determine the interests of all participators, including any who are not resident in the UK, by applying the tests of participation appropriate to the circumstances.

A is a 50% participator by reference to the shareholding of 50 shares

B is a 50% participator by reference to the shareholding of 50 shares

C is a participator as a loan creditor, being entitled to an amount of 400,000 out of the total capital of 1,000,000.

Step 3

Calculate the proportion of the gain apportionable to the interests of each participator. In this case the proportion for each participator is

A (as shareholder)

500,000 x 50% = 250,000
   

B (as shareholder)

500,000 x 50% = 250,000
   

C (as loan creditor)

500,000 x 40% = 200,000
   

Step 4

Consider whether the gains calculated in Step 3 represent a just and reasonable apportionment. In this case the apportionment is not just and reasonable as the total of the gains under the initial apportionment exceeds the actual gain. C is a participator only by virtue of being a commercial loan creditor, see CG57250. C’s entitlement as loan creditor should be ignored, subject to a review of the circumstances to establish that C is indeed merely a commercial loan creditor and has no entitlement to a share of profits or gains, and that there are no other arrangements. In this example it is assumed that there are no other arrangements and therefore the whole of the gain should be apportioned by reference to the interests in shares. The final apportionment becomes

A (as shareholder)

500,000 x 50% = 250,000
   

B (as shareholder)

500,000 x 50% = 250,000