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HMRC internal manual

General Insurance Manual

HM Revenue & Customs
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Taxation of the investment return: investment gains: paper for paper exchange of assets: section 473 ICTA 1988

In some cases the presumption of realisation on an exchange discussed at GIM5240 is displaced by ICTA88/S473, which covers certain exchanges of and other transactions involving

  • shares
  • securities within the meaning of TCGA92/S132 which are not loan relationships
  • rights in a unit trust
  • membership interests in a company which are not shares
  • options within TCGA92/S147

that are held as trading assets by, among others, an insurance company. ICTA88/S473 does not apply where the assets are held so that mark to market applies to them for tax purposes and the period of account ends after 31 July 2001 (ICTA88/S473 (2A)).

Where ICTA88/S473 applies the transaction is treated as not involving any gain or loss for trade profit purposes at the time of the exchange or other transaction. Instead the new assets are treated as acquired at the same time, and at the same cost, as the original shares or securities.

Transactions within ICTA88/S473 are those where the new assets amount to a new holding falling to be treated as the same asset as the original shares or securities under TCGA92/S126 to TCGA92/S136; or where the new assets comprise gilts received as compensation stock on the nationalisation of a company, within TCGA92/S134.

ICTA88/S473 will therefore apply where there is

  • a reorganisation of or reduction in the share capital of a company in which existing shareholders receive new holdings in respect of and in proportion to their existing holdings - TCGA92/S126 (CG51700+)
  • a conversion of securities into shares or other securities - TCGA92/S132 (CG55000+),
  • an exchange of shares on a company takeover, within TCGA1992/S135 (CG52521+),
  • a company reconstruction or amalgamation, within TCGA92/S136 (CG52700+).

These provisions will not, however, apply where (and to the extent that) either the original shares, or the new holdings, comprise qualifying corporate bonds - and this includes all loan relationships (see GIM5090+).

Under TCGA92/S138A a vendor who on a share exchange receives a right to deferred consideration depending on results (an ‘earn-out’) which can only be satisfied by an issue of shares or debentures may claim that this right should itself be treated as a security within TCGA92/S132 (see CG58000+). The approach of ICTA88/S473 may be applied in these circumstances.