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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Foreign exchange: matching: bringing amounts back into account: share disposals on or after 6 April 2010

Matched asset is shares: disposals on or after 6 April 2010

Regulation 4 of the EGLBAGL Regulations (SI 2002/1970) provides the main rule for bringing amounts back into account. Regulation 5 prescribes how much is brought into account - see CFM62350.

The amendments made to regulation 4 the EGLBAGL Regulations by SI 2010/809 apply to disposals on or after 6 April 2010. They provide that where a matched asset consists of shares, the ‘net gain’ or ‘net loss’ that has arisen on hedging instruments adjusts the disposal consideration for the shares.

  • If there is a net gain, the amount of the disposal consideration is increased by the amount of the gain.
  • If there is a net loss, the disposal consideration is redced by the amount of the loss. If the net loss exceeds the disposal consideration, the excess is treated as additional acquisition expenditure on the asset for the purposes of TCGA92/S38(1)(a).

‘Disposal consideration’ means any amount treated as disposal consideration for TCGA 1992 purposes.

Example 1

A company acquires shares in a French subsididary on 1 October 2008 for £3.2 million. It hedges the exchange risk on its investment by entering into a euro/sterling cross-currency swap. On 1 July 2011, it sells the shares for £5.7 million, and terminates the hedging arrangement. Substantial Shareholding Exemption (SSE) does not apply to the disposal. Aggregate exchange losses of £1.1 million arise on the swap over the period 1 October 2008 to 1 July 2011, and are disregarded under regulation 4 of the Disregard Regulations.

Under regulation 4 of SI 2002/1970, as amended, the disposal consideration for the shares is reduced by the £1.1 million ‘net loss’, giving an adjusted disposal consideration of £4.6 million. The company therefore has an unindexed gain on the share disposal of £1.4 million (£4.6 million less £3.2 million). This will be further reduced by indexation allowance.

Example 2

The facts are as in example 1, except that the disposal qualifies for SSE. Regulation 4 of the EGLBAGL Regulations still applies to decrease the disposal consideration, but this has no practical consequence, since no chargeable gain (or allowable loss) arises on the disposal.

Example 3

The facts are again as in example 1, except that the disposal is made to a related company (which is not, however, a member of the same capital gains group, so the group neutrality rule at TCGA92/S171 does not apply to the disposal). It is determined that the £5.7 million that it pays for the shares is not an arm’s length price, and under TCGA92/S17, the disposal is treated as being at the market value of the shares - £8 million. The £1.1 million ‘net loss’ is subtracted from the £8 million which is treated for TCGA 1992 purposes as disposal consideration.

Example 4

The facts are as in example 1, except that the company sells only 20% of the shareholding. It must therefore apply the part disposal formula in TCGA92/S42. Supposing that the amount received for the shares (amount A in the part disposal formula) is £1 million, and the market value of the remainder (B) is £4 million, application of the A/A+B formula means that the acquisition cost taken into account is:

£3.2 million x 1/1+4 = £640,000

If 20% of the £1.1 million net loss on the swap, i.e. £220,000, relates to the shares that are sold, the capital gains computation will be:

Disposal consideration 1,000,000
Reduction under EGLBAGL Regulations (220,000)
Acquisition cost (640,000)
Gain before indexation 140,000


Regulation 4(3) makes it clear that the reduction in the disposal consideration does not apply when apportioning the acquisition cost under TCGA92/S42.