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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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Share Loss Relief: background: potential complications

In the simplest cases, a claimant will have subscribed for shares at one time, will have held those shares unchanged for a period, and then disposed of them in a single transaction. In such cases it should be relatively straightforward to compute any allowable loss, and to determine whether the conditions necessary for Share Loss Relief are met. These simple cases are considered at VCM75230+.

A number of events and circumstances can complicate this simple situation. Sometimes the holder of the original shares comes to possess other shares, or assets which the TCGA treats as the same asset as the original shares for chargeable gains purposes, such as happens under a bonus issue of shares or when the original shares are exchanged for new shares. Are the new shares or assets eligible for Share Loss Relief in the same way as the original shares? Or the shareholder may hold shares of the same class some of which are eligible for Share Loss Relief and some not (for instance because they were bought from a third party and not subscribed for). When this happens, the TCGA may pool eligible and ineligible shares so that the allowable costs are averaged and the loss apparently available for Share Loss Relief is higher or lower than the loss strictly attributable to the eligible shares. The statute caters for these more complicated cases: a brief outline is given here, and there is detailed guidance at VCM75300+.

Cases where there has been an exchange of shares

A company (B) may acquire shares in another company (A) from company A’s shareholders by issuing shares or debentures to those shareholders as all or part of the consideration. Subject to certain conditions section 135 TCGA 1992 applies in such ‘paper-for-paper’ exchanges so that for the purposes of that Act the old and the new shares are treated as the same asset and the shareholder is treated as having acquired the shares in B at the same time and for the same cost as he acquired the shares in A, without having disposed of the latter or acquired the former. This raises the question of what happens when the original shares in A were eligible for Share Loss Relief.

ITA07/S145 and S146 provide for a ‘look-through’ treatment of simple share-for-share exchanges, so that the new shares issued by B can still be eligible for Share Loss Relief in the shareholder’s hands when he eventually disposes of them. This ‘look-through’ treatment is subject to several conditions which mean that its scope is more limited than the scope of TCGA92/S135. For detailed guidance on sections 145 and 146, see VCM75350+.

For guidance on TCGA92/S135, see CG52521.

Cases where there has been a bonus issue

Sometimes a company will issue new shares to existing shareholders in proportion to their existing shareholdings, without the need for the shareholders to contribute any new consideration. This is commonly called a bonus issue. Bonus issues are a class of reorganisation of a company’s share capital and fall within TCGA92/S126. The TCGA 1992 provides for a treatment similar to that of share-for-share exchanges: the bonus shares are treated as the same asset as the original shares (which are still held) and the shareholder is not regarded as having disposed of any of his original shares or acquired any new asset in the course of the bonus issue. Again the question arises of how the bonus shares stand if the original shares were eligible for Share Loss Relief.

ITA07/S135(4) addresses this question by deeming that the shareholder is treated as having subscribed for ‘corresponding bonus shares’. ‘Corresponding’ shares in this context are of the same class, and have the same rights, as the shares in respect of which they are issued. See VCM71020 and VCM71030.

Other cases where new shares are identified with eligible shares

TCGA92/S127 imposes the ‘same asset’ fiction and the ‘no disposal/no acquisition’ treatment described above in the context of share for share exchanges and bonus issues. Section 127 also applies to other types of transaction, such as reorganisations of a company’s share capital and reconstructions of a company’s business, so there are other circumstances in which the TCGA can treat a new asset as being the same as an original shareholding. The Share Loss Relief provisions need to accommodate these situations, and there is a general rule at ITA07/S136.

ITA07/S136 provides that, in some circumstances, Share Loss Relief may be available in respect of shares which make up the new asset when they are disposed of. The conditions which must be met are explained in detail at VCM75390.

Cases involving mixed holdings and part disposals of holdings

Shares in the same company and of the same class are indistinguishable one from another (the technical term is ‘fungible’). This is so even if the shares were acquired at different times, for different costs and in different circumstances. For instance, I may subscribe for 100 shares at £10 each, and then a year later I may subscribe for another 50 shares at £7 each, then after two years I might buy 200 shares from another individual for £15 each. If I then sell 100 shares for £11 each two questions arise:

  • In order to compute any allowable loss or chargeable gain under the TCGA, I need to determine the cost of the 100 shares I have sold: do they derive their cost from the first, second or third tranches bought?
  • Are any or all of the 100 shares sold eligible for Share Loss Relief? In order to answer this question I need to identify them with specific purchases of shares and then consider the terms of those purchases to see whether the conditions for Share Loss Relief were met.

Where Share Loss Relief may be in point, the second question must be considered independently of the first, as any allowable loss must accrue on ‘qualifying shares’ rather than being an apportionment of the loss on a mixed holding of qualifying and non-qualifying shares.

The TCGA contains detailed share identification rules for deciding the first question, but those rules do not always provide the answer to the second. In particular, the share pooling rules in the TCGA mean that the cost of one tranche of shares may be added to the cost of one or more other tranches and the total averaged across all the shares: in this way the cost of shares qualifying for Share Loss Relief can be inflated or depressed by costs of non-qualifying shares, and so an allowable loss computed under TCGA rules and apportioned to qualifying shares would result in an amount of Share Loss Relief which is greater or less than the true loss on the qualifying shares. This averaging problem will arise even where the whole of a mixed holding is disposed of, and it is known precisely how many qualifying shares are disposed of.

ITA 2007 therefore contains its own rules for dealing with disposals (or part disposals) of a mixed holding, which complement the rules in the TCGA. These rules can be complex, and are explained at VCM75400.