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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: bringing amounts back into account: share disposals before 6 April 2010

Matched asset is shares: disposal before 6 April 2010

Where a disposal of matched shares takes place before 6 April 2010, a ‘net gain’ on liabilities or derivatives that have been matched to the shares is brought into account as a chargeable gain accruing at the time of the disposal, while a ‘net loss’ is brought into account as an allowable loss.

Such gains or losses are ‘free standing’ - they are separate from any gain or loss arising on the share disposal. Because a gain accrues only at the time of the share disposal, it cannot be reduced by indexation allowance.

Substantial Shareholdings Exemption

Where the disposal of the shares is exempt under the substantial shareholding exemptions of TCGA92/SCH7AC, no gain or loss on matched liabilities or derivatives is brought back into account (regulation 4(2)(b)). Many investments by UK companies in overseas entities will, in practice, take the form of substantial shareholdings.

This provision for disposals of substantial shareholdings extends to disposals of assets related to shares, provided that the disposal qualifies for substantial shareholding exemption. An example of an asset related to shares would - for periods beginning before 1 January 2005 - be a security convertible into shares of the company concerned (provided that the convertible fell within FA96/S92 and was therefore not treated as a loan relationship).

Clogged losses

A problem arises if the company sells a matched asset to a connected person at a loss. The loss becomes clogged under TCGA92/S18(3) (see CG14561), and can only be set against gains arising from transactions with the same connected person. In the absence of any special rule, such a loss could not be set against the gain on the matching liability. Regulation 5(4) - applying to disposals before 6 April 2010 - provides such a special rule, enabling otherwise clogged losses to be deducted from an aggregate gain arising on the matched liability or currency contract.

Reallocation of gains or losses to other group members

Where a disposal of shares occurs on or after 21 July 2009, but before 6 April 2010, any gain or loss arising from the operation of the EGLBAGL Regulations cannot be allocated to another member of the group under TCGA92/S171A (CG45356). This is because, in order to be transferred by election, the gain or loss must accrue in respect of an asset - whereas gains or losses brought back into account under regulation 4 are in respect of liabilities or derivatives.

This does not apply to disposals before 21 July 2009, when the more limited provision in ‘old’ TCGA92/S171A applied (CG45358). Where one company (company A) disposed of an asset, it could elect jointly with another group company (company B); the effect of the election was that there was deemed to be a no gain/no loss disposal of the asset from A to B immediately before the real disposal to the external party. Company B was then treated as having made the actual disposal.

Where the asset was matched shares, the effect was

  • the deemed no gain/no loss transfer from A to B resulted in a ‘net gain’ or ‘net loss’ on associated hedging instruments crystallising under regulation 8 (CFM62320), and
  • being brought into account on company B when that company was treated as making the real disposal.