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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: regulation 10 example

Exchange of shares for QCBs following an earlier no gain/no loss disposal

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

Where an exchange of shares for qualifying corporate bonds (QCBs) would fall within TCGA92/S127 but for S116, then regulation 10 applies. S116 applies to cases within S127 where either

  • the original shares would consist of or include a QCB and the new holding would not, or
  • the new holding consists of or includes a QCB but the original shares did not.

The regulation applies specifically to cases where

  • there has previously been a no gain/no loss disposal so that no chargeable gain has been brought into account,
  • but the first relevant disposal (upon which it would be brought into account) has not taken place.

In these circumstances, regulation 10 applies regulation 9(4) to the deferred gain or loss calculated at the time of the no gain/no loss disposal. This means that gains are added to, or losses subtracted from, the market value of the original shares for the purposes of the disposal which TCGA92/S116 (10) deems to take place.


The facts are as in CFM62410, except that on 31 December 2003 Dromsall plc sells the shares in the Jersey company to another member of the UK group, Newdrom Ltd, and it is Newdrom Ltd which exchanges the Dromsall (Jersey) Ltd for debentures on 31 December 2005.

In the year to 31 December 2003, an exchange loss of £220,000 has arisen on the borrowing by which Dromsall plc has hedged its investment in the Jersey subsidiary. This has been taken to reserves. The transfer of the shares in the Jersey company is no gain/no loss under TCGA92/S171, and regulation 8 provides that the loss of £220,000 on the matching liability is deferred until a disposal occurs which is not no gain/no loss.

Newdrom Ltd does not hedge its investment in the Jersey company during 2004, but in 2005 it uses US-dollar options as a hedge. An exchange gain of £20,000 arises on the currency options and is matched in reserves with exchange losses on the shareholding.

When the shares are exchanged for debentures on 31 December 2005, TCGA92/S116(10) requires that a chargeable gain or allowable loss is computed on the assumption that the shares have been disposed of at market value. Under regulation 9(4), that market value is increased by £20,000 to take account of the exchange gains arising on Newdrom Ltd’s hedge. But it must also be decreased by £220,000 in respect of the deferred loss arising from Dromsall plc’s hedge. So if the market value is £25 million, we have:

Market value 25,000,000
Add Regulation 9(4) adjustment 20,000
Less Regulation 10 adjustment (220,000)
Deemed disposal consideration 24,800,000


As in the CFM62410 example, the chargeable gain or allowable loss computed using this deemed disposal consideration is taxed or relieved when the new holding of debentures is disposed of.