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HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: bringing amounts back into account: regulation 11 example

Example of disposal following a share capital reorganisation

This guidance applies only to reorganisations of share capital taking place before 6 April 2010

Eckusan plc draws up its accounts to 31 March. On 1 April 2003 it incorporates a 100% subsidiary in Switzerland, Eckusan (IP Holdings) SA, which does not carry on a trade.

The net asset value of Eckusan (IP Holdings) SA is approximately SFr 30 million, and Eckusan plc partially hedges its investment by a series of 3-month Swiss franc forward contracts. All gains and losses on these contracts are taken to reserves. Between 1 April 2003 and 1 July 2004, an exchange loss of £500,000 arises on the hedging contracts.

On 1 July 2004, there is a group reorganisation. A new subsidiary of Eckusan plc, Eckusan European Holdings Ltd, is formed. Eckusan European Holdings Ltd issues its own shares to Eckusan plc in exchange for the shares in Eckusan (IP Holdings) SA. Thus the effect is to insert the new company into the ownership chain between Eckusan plc and Eckusan (IP Holdings) SA.

The share-for-share exchange falls within TCGA92/S135, and therefore by virtue of TCGA92/S127 it is not treated as a disposal by Eckusan plc. The shares in Eckusan European Holdings Ltd constitute the ‘new holding’ for the purposes of S127.

Had there been a disposal, the exchange loss of £500,000 on the currency contracts which hedge the shareholding would have been brought into account as an allowable loss. Under Regulation 11(4)(a), this amount decreases the consideration on any subsequent disposal of the ‘new holding’.

Suppose that on 31 March 2007, Eckusan plc sells the shares in Eckusan European Holdings Ltd to a US member of the Eckusan group for their market value, £14 million. The shareholding does not qualify for the substantial shareholding exemption, and the company must bring into account a chargeable gain or allowable loss on the disposal. For the purposes of this CG computation, the actual disposal value of £14 million is reduced by £500,000 to £13.5 million.

Note that although the exchange loss arose on currency contracts used to hedge an investment in the Swiss company, after the share-for-share exchange the loss becomes attached to the new holding, the shares in Eckusan European Holdings Ltd. A disposal of the shares in the Swiss company will not trigger relief for the loss. Indeed, were the disposal of Eckusan European Holdings Ltd to qualify for the substantial shareholding exemption (perhaps because the company also has trading subsidiaries and qualifies as the holding company of a trading sub-group) the loss would never be relieved. In practice, it will often be the case that exchange gains or losses calculated under Reg 11 would never actually be taxed or relieved.