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HMRC internal manual

Venture Capital Schemes Manual

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Share Loss Relief: individual and corporate claimants: individual claimants: more complex cases: mixed holdings and part disposals: limiting share loss relief: second case

ITA07/S147starts with the premise that an individual has disposed of qualifying shares and sets out three groups of circumstances in which the amount of Share Loss Relief available on that disposal may need to be limited to a figure below the allowable loss computed for TCGA 1992 purposes.

The second group of circumstances is where the qualifying shares disposed of, along with other shares that are not capable of being qualifying shares, are treated as acquired by a single transaction by virtue of TCGA92/S105(1)(a).

TCGA92/S105 is part of the share identification rules which apply when computing chargeable gains and allowable losses on disposals of shares. There is detailed guidance at CG50820+. In summary, where shares of the same class in the same company are acquired by the same person on the same day and in the same capacity then all the shares so acquired are treated as acquired by a single acquisition (and they are identified firstly with similar shares disposed of on the same day and which are likewise treated as disposed of by a single transaction). This treatment by the TCGA takes no account of whether or not the shares are capable of being qualifying shares for Share Loss Relief purposes, so again there is a risk of the allowable loss under the TCGA rules being inflated because of interaction with costs incurred in respect of non-qualifying shares.

Where this situation applies the amount of Share Loss Relief on the disposal is not to exceed the deductions which would be allowed in calculating the amount of the loss if the qualifying shares were treated as acquired by a single transaction and the other shares were not so treated.

Example

Mr P holds 5,000 £1 Ordinary shares in K Limited. On 24 January he subscribes for 1000 £1 Ordinary shares in K Limited at £1.25 per share (assume these are qualifying shares). At other times on the same day he buys a further 500 shares in the market at £1.40 per share and another 2,000 from a friend for £1.45 each. He also sells 500 shares for £1.15 each. For TCGA 1992 purposes there is deemed to be one acquisition of 3,500 shares with (effectively) an average price of £1.39 each ([1000 x £1.25 + 500 x £1.4 + 2000 x £1.45]/[1000 + 500 + 2000] = £4,850/3,500). The 500 shares sold are identified with the shares acquired on the same day by virtue of section 105 TCGA 1992. Under TCGA rules his gain or allowable loss will be computed using an effective cost of £1.39 per share giving a loss of £118:

Proceeds of sale £575 500 x £1.15
     
Cost £693 £4,850 x [500 x £1.15]/[500 x £1.15 + 3000 x £1.15]
Allowable loss £118  

But in fact he has lost 10p on each of the shares he subscribed for (£1.25 - £1.15), a total of only £50: should the Share Loss Relief available be £118 or £50?

ITA07/S147(4) applies, so for Share Loss Relief purposes the 1000 qualifying shares acquired on 24 January are not pooled with any other shares acquired on that date. The 500 shares disposed of are still identified with shares acquired on the same day, and as they are known to be qualifying shares they must be identified with 500 of the shares subscribed for on that day. The allowable deduction in respect of those shares is 500 x £1.25 = £625. Mr P’s Share Loss Relief may not exceed £625 so relief of £82 (equal to the allowable loss computed using the TCGA rules) is available.

Notice that the available relief is not restricted to the actual loss on the qualifying shares: the aim of ITA07/S147 is to prevent Share Loss Relief exceeding the total amount the claimant has given for the shares.