Share Loss Relief: individual and corporate claimants: individual claimants: when relief is restricted: taking account of reorganisations and reconstructions
In many cases a claimant will have subscribed for shares, held those shares for a time, and then disposed of the same shares. It will be easy to identify the shares disposed of with shares acquired in order to decide the availability of Share Loss Relief, for instance by determining whether the shares were qualifying shares (see VCM71020 for the meaning of qualifying shares). But it is quite common for a shareholder to acquire other shares as well as, or to replace, the shares subscribed for, with or without giving any new consideration. When those other shares are disposed of, special rules are required in order to determine whether Share Loss Relief is due in respect of any loss which accrues.
The TCGA provides for a number of situations and events in which shares held after an event (taken all together) are treated as the same asset as shares held before an event, and the event itself is deemed to be neither a disposal nor an acquisition of assets so no chargeable gain or allowable loss accrues at the time. With no allowable loss, there can be no claim to Share Loss Relief, so there are rules to allow relief in some cases on later disposals notwithstanding that the asset disposed of may not be the shares originally subscribed for.
The TCGA recognises three broad categories of event in which these ‘no disposal’ and ‘single asset’ fictions apply. They have in common the feature that an existing shareholder receives new shares, or suffers a change to their holding, by virtue of their already holding shares: contrast this with the acquisition of shares by a person on terms which are independent of whether they already hold shares of not, for instance by purchase in the market.
Reorganisations and reductions of a company’s share capital
These are actions by one company to reorganise or reduce its own share capital, such as bonus issues, rights issues, and division or aggregation of shares. The principle is that although a shareholder may end up with a different asset or set of assets from the one they started with, his or her proportionate interest in the company is essentially unchanged (or, in the case of a rights issue, would be unchanged if the shareholder took up in full his or her allotment of shares). It is reasonable to proceed on the basis that they have not made a disposal, at least to the extent that they have not received any cash or money’s worth other than new shares or loan notes issued by the company. It is necessary to decide whether, if the original shares were qualifying shares for Share Loss Relief purposes at the time of the reorganisation, the shares held afterwards are also capable of being qualifying shares. There is guidance on this at VCM75330 - VCM75340. For guidance on reorganisations of share capital in the context of chargeable gains, see CG51700+.
Share-for-share and share-for-debenture exchanges
Where one company acquires the shares or debentures of another company by issuing its own shares or debentures to holders of shares in the second company, the TCGA provides that subject to certain conditions the acquiring company’s shares etc are treated as being the same as the original shares in the shareholder’s hands. It is necessary to decide whether, if the second company’s shares were qualifying shares at the time of the exchange, the shares in the acquiring company will be capable of being qualifying shares after the exchange. There is guidance on this at VCM75350+. For guidance on the chargeable gains treatment of such exchanges, see CG52521+.
A company (B) may issue shares to holders of shares in another company (A) as consideration for company A transferring most or all of its business to company B under a scheme of merger or division or the like. The TCGA provides that, subject to certain conditions, after the event the original A and new B shares are the same asset as the original A shares in each shareholder’s hands. If company A’s shares were qualifying shares at the time of the reconstruction it will be necessary to decide whether the shares issued by company B, and any remaining company A shares, will be capable of being qualifying shares after the reconstruction. There is guidance on this at VCM75380+. For guidance on the chargeable gains treatment of reconstructions, see CG52700+.