LAM03730 - Calculation of ‘I’ Income and chargeable gains: Substantial shareholdings exemption (SSE): the interaction of the SSE rules and other life tax rules

SSE: interaction with box transfers

The SSE exemption in TCGA92/SCH7AC does not apply where there is a deemed disposal on the transfer of an asset of an insurance company from one category to another, i.e. a box transfer under FA12/S116 to S118 (see LAM03210) SCH7AC/PARA6(1)(c).

SCH7AC can apply where there is a transfer out of, or into, the long-term insurance business boxes to, or from, another group company. Paragraph 6(1) does not exclude such a disposal. It is not a no gain/no loss disposal because S118(6) disapplies TCGA92/S171, and so it is not within SCH7AC/PARA6(1)(a). As it is an actual, rather than a deemed, disposal, it is not within PARA6(1)(c).

Gains from shares: SSE: interaction with share exchange rules

Special rules apply to give the SSE priority over other chargeable gains rules including the share exchange rules at TCGA92/S127 (TCGA92/SCH7AC/PARA4(1)(b)). In the case discussed in LAM03700 a share exchange, between boxes within the long-term insurance fund does not trigger a disposal under FA12/S116 to 118. Given this, the application of SSE needs to be considered where shares by a life insurance company, for the purposes of its long-term business, are exchanged for another group company’s shares.

The interaction of the rules is complicated and is best illustrated by considering an example in a step by step manner.

Life Co transfers shares in company A to company B in exchange for an issue of shares in company B. All companies are part of a capital gains group.

  1. TCGA92/S127, is disregarded for SSE purposes. In line with the examples shown at CG53170A we will call this disposal ‘the assumed disposal’;
  2. the assumed disposal is found to be an intra-group disposal to which TCGA92/S171 could apply, because on the basis of the assumption that there is a disposal (as S127 is disregarded), TCGA92/S171(3) will not have effect to switch off TCGA92/S171(1);
  3. however, FA12/S118(6) would disapply TCGA92/S171;
  4. as the shares are no longer backing long-term business in company A and moving to another group company Schedule 7AC could apply. This is because the transfer is not a no gain/no loss disposal – PARA6(1)(a) – nor a deemed disposal falling within PARA6(1)(c).
  5. if this disposal produces a chargeable gain or allowable loss that falls within the SSE rules TCGA92/SCH7AC/PARA4(3) applies to prevent TCGA92/S127 from applying.

The result would be that Life Co makes a disposal of this holding of shares in company A for consideration equal to the market value of the shares issued by company B (TGA92/S18). Any gain or loss arising on the disposal is, by virtue of the SSE, not a chargeable gain or allowable loss. Company B acquires the shares in company A at the value of the shares it issued to Life Co. Life Co acquires the newly issued shares in company B at the amount or value of the consideration (the shares in A) given for them.