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HMRC internal manual

Venture Capital Schemes Manual

HM Revenue & Customs
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Share Loss Relief: individual and corporate claimants: individual claimants: more complex cases: shares received in exchange for other shares in a take-over: general

This is the third of a group of complicating factors in which a shareholder comes to own shares or other assets by virtue of their already owning shares in the same, or a different company (the others are bonus issues, see VCM75330, and rights issues, see VCM75340). Subject to certain conditions being met, it may be that the shares acquired later can give rise to Share Loss Relief when disposed of and if that is so then questions arise as to the amount of loss properly attributable to them.

One company (B) may take over another company (A) by acquiring all the shares issued by A. The consideration given by Company B to company A’s shareholders will often take the form of newly-issued shares in company B, either alone or with cash or loan notes. In its simplest form, this sort of transaction may be called a ‘share-for-share exchange’, and it raises the question of whether or in what circumstances losses on the newly-issued shares in company B are eligible for Share Loss Relief.

For the purposes of Share Loss Relief, there are two categories of share-for-share exchange which are subject to special rules. The first category contains exchanges to which section 135 and hence section 127 TCGA 1992 apply. The second category is a subset of the first: it contains exchanges which meet the further conditions in ITA07/S145(1) and to which sections 145 and 146 therefore apply.

New shares issued under exchanges falling within the first category (but not the second) are subject to ITA07/S136. The person to whom the new shares are issued will not be eligible for Share Loss Relief on those shares unless he or she would have received Share Loss Relief on a disposal of the old shares at the time of the exchange. If they are eligible on this basis then whether Share Loss Relief is available or not will depend on the new shares being qualifying shares in their own right. The new shares were subscribed for and consideration was given in the form of the old shares (it is only for the purposes of section 136 that this is not deemed to be competent consideration). You will need to confirm that the company issuing the shares is a qualifying trading company in order to be satisfied that the definition of qualifying shares at section 131(2)(b) is met (see VCM74300+).

New shares issued under exchanges falling within the second category are not subject to the presumptive denial of Share Loss Relief in ITA07/S136. Instead sections 145 and 146 effectively require you to ‘look through’ the exchange and treat the original and the new company, and their respective shares, as the same when considering whether the shares disposed of are qualifying shares. Thus you determine whether and when the shares were subscribed for by reference to the original company, and whether they were issued by a qualifying company, by reference to both the original and the new company according to which company’s shares were held at any time.

The pitfalls that can arise when there are share exchanges are illustrated by the decision of the First Tier Tribunal in Lachmann and another v HMRC ([2010] UKFTT 560 (TC), TC00811).

The effects of ITA07/S145 and S146

Where sections 145 and 146 apply, the exchange is treated as involving neither any disposal of the old shares nor any acquisition of the new shares, and the new shares are treated as being the same as the old shares in terms of

  • when and for what consideration they were subscribed for,
  • the time at which they were issued,
  • whether at any time before the exchange they met the conditions for Share Loss Relief to be available.

These deemings correspond to the statutory fictions in TCGA92/S127, but the latter go further in that they treat the old and new shares as the same asset and they apply to more types of exchange than are specified by ITA07/S145, as well as to other classes of transaction (albeit only for the purposes of the TCGA).