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HMRC internal manual

Investment Funds Manual

Real Estate Investment Trust : Capital gains: company reconstructions (TCGA1992/S135)

TCGA1992/S135 may apply when a holder of shares or debentures in one company exchanges them for shares or debentures issued by another. When S135 does apply, the new shares or debentures are treated as the same asset as the original shares or debentures. In other words, there is no disposal for capital gains purposes and any gain or loss latent in the original assets is ‘rolled over’ into the new assets. There are no special rules governing the operation of S135 in the context of companies within CTA2010/Part 12 (Real Estate Investment Trusts). 

For detailed guidance on TCGA1992/S135, see CG52521+.

Example

This example illustrates the operation of TCGA1992/S135 where a UK-REIT is involved.

Company T is a property investment company, which is not within CTA2010/Part 12. The holders of shares in T exchange them for newly-issued shares in unconnected company G. G is a member of a Group REIT. Assume the conditions necessary for S135 to apply are met (CG52523).

The shares in G which are acquired by the former shareholders of T are treated as having the same date of acquisition and CG base cost as their T shares. The CG base cost of the T shares in G’s hands is equal to their market value at the time of the exchange. This is the normal effect of TCGA1992/S135. T becomes a member of the G group because of the share exchange. CTA2010/S536 applies to T at this point:

  • The property rental business of T is treated as ceasing;
  • The property rental assets held by T are treated as being sold by T and immediately re-acquired by the property rental business of T  for consideration equal to their market value; 
  • This deemed sale and re-acquisition does not give rise to any chargeable gain (or allowable loss);

See also the section on capital allowances at [TCGA1992/S135 may apply when a holder of shares or debentures in one company exchanges them for shares or debentures issued by another. When S135 does apply, the new shares or debentures are treated as the same asset as the original shares or debentures. In other words, there is no disposal for capital gains purposes and any gain or loss latent in the original assets is ‘rolled over’ into the new assets. There are no special rules governing the operation of S135 in the context of companies within CTA2010/Part 12 (Real Estate Investment Trusts). 

For detailed guidance on TCGA1992/S135, see CG52521+.

Example

This example illustrates the operation of TCGA1992/S135 where a UK-REIT is involved.

Company T is a property investment company, which is not within CTA2010/Part 12. The holders of shares in T exchange them for newly-issued shares in unconnected company G. G is a member of a Group REIT. Assume the conditions necessary for S135 to apply are met (CG52523).

The shares in G which are acquired by the former shareholders of T are treated as having the same date of acquisition and CG base cost as their T shares. The CG base cost of the T shares in G’s hands is equal to their market value at the time of the exchange. This is the normal effect of TCGA1992/S135. T becomes a member of the G group because of the share exchange. CTA2010/S536 applies to T at this point:

  • The property rental business of T is treated as ceasing;
  • The property rental assets held by T are treated as being sold by T and immediately re-acquired by the property rental business of T  for consideration equal to their market value; 
  • This deemed sale and re-acquisition does not give rise to any chargeable gain (or allowable loss);

See also the section on capital allowances at](https://www.gov.uk/hmrc-internal-manuals/investment-funds/ifm24010) for the application of the shadow capital allowance regime which applies to the property rental assets when T enters the REIT regime.