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HMRC internal manual

Shares and Assets Valuation Manual

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HM Revenue & Customs
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Capital Gains Tax procedures: negligible value

Introduction

Under Section 24(2) TCGA 1992 a taxpayer may make a claim to be treated as though he/she had sold an asset and immediately reacquired it for an amount equal to its value. Claims must be submitted to the Inspector. If a taxpayer makes a negligible value claim in respect of shares, the Inspector may ask SAV for an opinion as to

  1. Whether the shares were of negligible value at the date claimed.
  2. Whether the shares had become of negligible value, in other words, were they of negligible value when acquired?
  3. The value of the shares on acquisition.
  4. The value of the shares at 31 March 1982.

The technical instructions on negligible value claims can be found in the CG manual at CG13131+. As capital losses on certain disposals of unquoted trading companies may be set against income, the guidance on losses claimed against income under s131 ITA 2007 (formally, s274 ICTA 1988) is provided in the Venture Capital Manual at VCM45000+. Helpful guidance is provided for taxpayers in Help Sheet HS286 ‘Negligible Value Claims and Income Tax Losses on Disposals of Shares you have Subscribed for in Qualifying Companies’. This is available on the Internet.

It is for the Inspector to decide whether a valid claim has been made. SAV’s role is to comment on the value of the shares. However, when considering the value you may well have access to far more information than the Inspector. You should bear in mind the following points and advise the Inspector if you have any doubts on the validity of the claim.

  • The date of the claim is the date the letter or Tax Return in which the taxpayer made the claim is received by HMRC. However, under S24(2)(a) and(b) TCGA 1992 the taxpayer is allowed to specify an earlier time in the claim if:

    • the taxpayer owned the asset at the earlier time; and
    • the asset had become of negligible value at the earlier time; and either
    • for capital gains tax purposes the earlier time is not more than two years before the beginning of the year of assessment in which the claim is made; or
    • for corporation tax purposes the earlier time is on or after the first day of the earliest accounting period ending not more than two years before the time of the claim.

Note that with effect from 6 April 1996, the shares do not have to be of negligible value at the date when the claim was made.

  • If the taxpayer wishes to make a claim for a tax year that has ended and he/she has received a notice to deliver the tax return for that year, the negligible value claim must be made in that return. The taxpayer can, however, make a claim for the current tax year outside the return and can use the PTVC procedure to check on any valuation used in connection with the claim.
  • The taxpayer must still own the asset when the negligible value claim is made. If the company has been dissolved, the asset no longer exists and a claim under S24 (2) TCGA 1992 is inappropriate. In that situation the shares are treated as having been disposed of under S.24 (1) TCGA 1992. Similarly, if a taxpayer sells his/her entire shareholding for a negligible sum, this is an actual disposal and the retrospective relief afforded by S24 (2) TCGA 1992 is not in point.
  • In order to claim Venture Capital loss relief, the shares must have been acquired by subscription for money or money’s worth.
  • If the taxpayer has subscribed for further shares shortly before the date on which the shares are claimed to have become of negligible value, you should consider whether the acquisition was an arm’s length transaction. If the acquisition was not a bargain made at arm’s length, then market value can be substituted under the following provisions

    • S17 TCGA 1992, see the CG Manual at CG14540
    • S128(2) TCGA 1992, see the CG Manual at CG51820
    • S251(3) TCGA 1992 , see the CG Manual at CG53510

The most common situation that we meet is when a loan account is converted in to shares. If the loan is converted into shares and the new shares are issued as part of a share reorganisation, S127 TCGA 1992 provides that the transaction is treated as involving no acquisition of shares. However, if the transaction was not a bargain at arm’s length, under S128(2) TCGA 1992 the consideration given for the new shares is restricted to the amount by which the market value of the new holding exceeds the market value of the original shares immediately before the reorganisation. See the CG Manual at CG53516A.

If the issue of shares in exchange for a loan is not treated as a share reorganisation, the special rules on the satisfaction of debts in S251 TCGA 1992 apply. These provisions may limit the allowable cost of the new shares to their market value, whether the transaction was a bargain at arm’s length or not. The provisions of S251 (3) TCGA 1992 are mandatory irrespective of the reason for the conversion of the loan account(s). 

Are the shares of Negligible Value?

Shares can only be regarded as being of Negligible Value when there is no prospect of a return to the shareholders through future earnings or through a sale of the company’s assets.

The onus is on the taxpayer to establish by clear and cogent evidence, which must have been available at the valuation date, that the value of any holding of shares had become negligible at a specific date or within a particular fiscal year.

SAV normally requires evidence to support the claim in the following form:-

  • a letter from the liquidator or receiver stating that there is no prospect of a return to the shareholders or
  • an estimated statement of affairs or balance sheet showing significantly more debts than assets and a statement that the company has ceased trading. If a company is still trading, in addition to the balance sheet there should be recent profit and loss accounts showing losses.

The valuer is trying to judge whether the company has reached a state where, if it were to sell all of its assets, it would not have enough money to pay its creditors. It must be remembered that ordinary shareholders are paid last in the event of the company being wound up. As preference shareholders are paid out before ordinary shareholders, the situation can arise where a Negligible Value claim is accepted for ordinary shares but not for preference shares.

It is possible for a holding of shares in a company to be of negligible value even though the company continues to trade, but it is more difficult for a claimant to provide proof of negligible value in these circumstances.

If you do not receive sufficient evidence to substantiate the claim, under SA you have to obtain the taxpayer’s agreement to the withdrawal of the claim. If you cannot obtain the taxpayer’s agreement and the Inspector requests a valuation for a decision letter please refer the matter to the Appeals Team.

What does negligible mean?

The word “negligible” is not statutorily defined.

Dictionary definitions include

  • “Capable of being neglected or disregarded”;
  • “Something which need not be taken into account”;
  • “Too small to be taken into account”. For an asset to have become of negligible value it need not have a nil value but it will be worth next to nothing.

Is there a rule of thumb to define “negligible”?

No. The test is an objective one. Were the shares or securities of negligible value at the time claimed? Negligible has the meanings stated above. A rule of thumb percentage of either the nominal value of the securities or of the price for which you originally acquired them may not work. The securities could pass such a percentage test but still have a significant value. We consider each case on its own merits.

Quoted Shares

A list of all shares or securities formerly quoted on the London Stock Exchange which have been officially declared of negligible value for the purpose of S24 (2) TCGA is maintained on the HMRC’s Internet site at . This list is updated monthly.

If you agree for the first time that shares in a formerly quoted company have become of negligible value you must notify the Business Support Team who will arrange for the negligible value list on the Internet to be updated.

 

  Additional Guidance: SVM150000