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HMRC internal manual

Corporate Finance Manual

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Foreign exchange: matching: bringing amounts back into account: example of no gain/no loss transfer

Disposal after no gain/no loss transfer - example

Example 1 - external disposal on or after 6 April 2010

Facts

X Ltd is a UK resident company which, on 1 June 2003, subscribed $5 million (£3,057,000 in sterling terms) for shares in a US subsidiary. It hedged the investment by borrowing $5 million from a bank. Under SSAP 20, exchange gains or losses on the borrowing were taken to reserves and matched with exchange differences on the shares: for tax purposes, these gains or losses were disregarded under FA96/S84A(3).

On 1 March 2005, X Ltd sold the shares in the subsidiary at fair value to Y Ltd, a company in the same capital gains group. Y Ltd hedged currency risk on the shareholding by means of a sterling/US dollar cross-currency swap. Y Ltd had adopted FRS 26 and took exchange differences on the swap to profit and loss account, but for tax purposes they were - to the extent that the derivative was matched to the asset - left out of account under regulation 4 of the Disregard Regulations (SI 2004/3256).

On 30 September 2011, Y Ltd sells the shares to an unrelated party for (in sterling terms) £4 million.

  • In the period up to 1 March 2005, exchange gains of £455,500 arise on X Ltd’s borrowing and are not brought into account by virtue of FA96/S84A(3).
  • In the period 1 March 2005 to 30 September 2011, exchange losses of £801,200 arising on Y Ltd’s currency swap are disregarded under regulation 4 of the Disregard Regulations.

Tax analysis

The sale of the shares by X Ltd to Y Ltd is a no gain/no loss disposal under TCGA92/S171. The effect of regulation 8 is that X Ltd does not bring anything into account under the EGLBAGL Regulations when the disposal occurs.

The ‘first relevant disposal’ is the sale of the shares by Y Ltd on 30 September 2011. Y Ltd does not make an election under regulation 14 of SI 2010/809 (see CFM62340 for the effect if it does make an election).

In computing the ‘net gain’ or ‘net loss’ arising under regulation 5 of the EGLBAGL Regulations, the exchange differences arising in X Ltd and in Y Ltd, in all relevant accounting periods, are simply aggregated. So Y Ltd has a ‘net loss’ of £345,700, comprising its own loss of £801,200 and X Ltd’s gain of £455,500.

The disposal consideration for the shares of £4,000,000 is therefore reduced by £345,700 to £3,654,300 when computing the chargeable gain accruing to Y Ltd on the disposal.

If, however, substantial shareholding exemption applies to the disposal, the reduction becomes irrelevant - no gain will be brought into account.

Example 2 - external disposal before 6 April 2010

The facts are as in example 1, except that Y Ltd sells the shares on 30 November 2009. An exchange loss of £850,000 arises on Y Ltd’s cross-currency swap in the period 1 March 2005 to 30 November 2009, and is left out of account under regulation 4 of the Disregard Regulations.

The intra-group transfer is a disposal that triggers the computation of a chargeable gain - under regulation 5, this is a ‘net gain’ of £455,500. The effect of regulation 8 (as it stood before amendment by SI 2010/809) is that this gain is not brought into account by X Ltd. Instead, it is brought into account on the occasion of the ‘first relevant disposal’ by the company making that disposal - Y Ltd.

When Y Ltd sells the shares on 30 November 2009, it brings into account

  • an allowable loss of £850,000, representing its own ‘net loss’ brought back into account under regulation 4, plus
  • a chargeable gain of £455,500, under regulation 8.

Both the loss and the gain are ‘free-standing’ and separate from the chargeable gain arising on disposal of the shares. If, however, substantial shareholdings exemption applies to the share disposal, regulation 4(2)(b) ensures that nothing is brought back into account under the EGLBAGL Regulations either.