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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: bringing amounts back into account: regulation 9 example

Example of transaction to which regulation 9 applies

This guidance applies only to exchanges of shares for QCBs happening before 6 April 2010

Dromsall plc has a wholly-owned investment subsidiary incorporated in Jersey, Dromsall (Jersey) Ltd, which accounts in US dollars and has net assets of $20 million. The group’s accounting date is 31 December.

Dromsall plc partially hedges its investment in the subsidiary by an external loan of $10 million, commencing on 1 January 2003. The following exchange gains or losses on the loan are taken to reserves:

Year ended 31 December 2003 £220,000 loss
Year ended 31 December 2004 £95,000 loss
Year ended 31 December 2005 £15,000 gain
Aggregate £300,000 loss


A group reorganisation takes place on 31 December 2005. As part of the reorganisation, another group company, Dromsall (UK Finance) Ltd, issues debentures to Dromsall plc in exchange for the shareholding in Dromsall (Jersey) Ltd. The market value of the shareholding at that time is £25,000,000.

On 31 December 2008, the debentures mature and are redeemed by Dromsall (UK Finance) Ltd for their nominal value.

TCGA92/S135 applies to the reorganisation on 31 December 2005, so that the exchange of shares in Dromsall (Jersey) Ltd for debentures is not treated as a disposal of the shares. However, since the debentures are QCBs, Dromsall plc is required by S116(10) to compute a chargeable gain or allowable loss on disposal of the shares, on the assumption that the disposal is at market value. Since Dromsall (Jersey) Ltd is an investment company the substantial shareholding exemptions will not be due and a chargeable gain can accrue from the hypothetical disposal under S116(10).

The market value is, however, reduced by the net exchange loss on the hedging liability, as is required by Regulation 9(4)(b). The $10 million borrowing has been fully matched up to 31 December 2005, so the net exchange loss is the aggregate of amounts which have been taken to reserves in respect of the borrowing - £300,000.

Suppose that the indexed acquisition cost of the Dromsall (Jersey) Ltd shares is £23.5 million. The computation is:

Market value of shares at 31 December 2005 25,000,000
Less exchange loss on matched liability ( 300,000)
Deemed disposal value 24,700,000
Indexed acquisition cost 23,500,000
Chargeable gain 1,200,000


This gain is brought into charge in the year ended 31 December 2008, when the disposal of QCBs occurs.

Had the market value of the shares been only £200,000 when they were exchanged for debentures, the net exchange loss on the matched liability would have been £100,000 more than the market value. In such a case, the deemed disposal value of the shares would be nil, and in addition an allowable loss of £100,000 would be treated as accruing when the debentures are disposed of.