Policy paper

Capital Gains Tax - Share Exchange

Published 15 March 2023

Who is likely to be affected

Individuals who hold more than 5% of shares and securities in a UK close company and exchange some or all of those securities for an equivalent holding of securities in a non-UK company.

General description of the measure

The measure deems securities in a non-UK company acquired in exchange for securities in a UK company to be located in the UK for the purpose of Capital Gains Tax (CGT). Individuals will pay tax on gains or dividend and distribution income received in respect of those securities deemed to be located in the UK in the same way as they would if the securities were in a UK company. If securities deemed to be located in the UK by this measure are later exchanged for securities in another non-UK company, the newly acquired securities are also deemed to be located in the UK, regardless of the number of subsequent exchanges of such securities that take place.

This measure will only apply where the UK company is a close company and the non-UK company would be a close company if it were a UK company. In particular, it will prevent UK resident non-domiciled individuals who exchange securities in a UK company for securities in a non-UK company from accessing the remittance basis of taxation on gains realised on the disposal of those non-UK securities or distributions received in respect of those securities.

Policy objective

The measure will promote fairness in the tax system and ensure that where value has been built up in a UK business it is taxed in the UK. In particular, the measure ensures UK resident non-domiciled individuals are taxed on gains and distributions received where value has been built up in a UK business.

Background to the measure

The measure was announced and draft legislation was published at the Autumn Statement 2022. Minor changes to the draft legislation have been made to ensure it works as originally intended. These changes confirm that the measure continues to apply in situations where multiple exchanges of securities take place.

Detailed proposal

Operative date

The measure will have effect for share exchanges or schemes of reconstruction carried out on or after 17 November 2022.

Current law

The current law on share exchanges and schemes of reconstruction can be found at sections 127, 128, 135 and 136, Chapter 1 of Part 4 and Schedule 5AA Taxation of Chargeable Gains Act 1992 (TCGA 1992).

Other relevant CGT provisions can be found at sections 263A and 263B of Part 7 TCGA 1992.

The rules on relevant foreign income can be found at Section 830 in Chapter 1 of Part 8 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005).

The law on the remittance basis can be found at Chapter A1 of Part 14 Income Tax Act 2007.

The current law on close companies can be found at Part 10 Corporation Tax Act 2010.

Proposed revisions

Legislation will be introduced in Spring Finance Bill 2023 to insert new sections 138ZA to 138ZC into TCGA 1992. These deem securities in a non-UK company to have UK situs when:   

• an individual obtains non-UK securities in exchange for UK securities and either of sections 135 or 136 TCGA 1992 applies
• the companies involved are close (or would be if it was a UK company) and the individual holds at least 5% of the securities in the UK company before exchange and in the non-UK company after exchange

Where the deeming provision applies, then the new holding acquired in the non-UK company will be treated as having UK situs (the ‘deemed UK holding’). If the deemed UK holding is later exchanged for securities in another non-UK company, the deeming provision applies such that the newly acquired securities will be treated as having UK situs. This deeming provision continues to apply to any subsequent occasions where the deemed UK holding is exchanged for securities in another non-UK company. The deemed UK holding will continue if the holding is disposed of to a spouse or civil partner. This means that if the deemed UK holding is disposed of by a UK resident non-domiciled individual, they will be unable to claim the remittance basis on any chargeable gain on the disposal.  

The legislation gives individuals the option to elect out of its provisions by choosing to pay a CGT charge based on the market value of the securities in the UK company at the point of the reorganisation. Individuals must make the election before the first anniversary of 31st January following the tax year in which the reorganisation takes place.

A new section 830(3A) will be inserted into ITTOIA 2005, this rule will mean that dividends and other distributions received in respect of a deemed UK holding will not be considered relevant foreign income. If such income is received by a UK resident non-domiciled individual, they will be unable to claim the remittance basis on that income.

Summary of impacts

Exchequer impact (£m)

2022 to 2023	2023 to 2024	2024 to 2025	2025 to 2026	2026 to 2027	2027 to 2028
0	+95	+200	+195	+180	+160

These figures are set out in Table 5.1 of Autumn Statement 2022 and have been certified by the Office for Budget Responsibility. More details can be found in the policy costings document published alongside Autumn Statement 2022.

Updated estimates consistent with Spring Budget 2023 forecasts can be found in Table 4.2 of Spring Budget 2023.

Economic impact

This measure is not expected to have any significant macroeconomic impacts.

Impact on individuals, households and families

This measure is expected to affect a very small number of wealthy UK resident non-domiciled individuals a year. These individuals will now need to pay tax on the arising basis on the disposal of a UK business which they will need to self-assess and pay tax on in the usual way.

The measure could affect the experience of dealing with HMRC for a very small number of affected individuals who will now need to either make an election to HMRC or report gains and income to HMRC on their Self Assessment tax return that they do not currently have to report. This impact will be mitigated by the provision of guidance about the change and their new obligations.   

The measure is not expected to impact on family formation, stability or breakdown.

Equalities impacts

It is not expected that there will be adverse effects on any group sharing protected characteristics.

Impact on business including civil society organisations

This measure is expected to have a negligible impact on a very small number of businesses a year, but some may need to be aware of the potential impact on their shareholders or wealthy non-domiciled clients. A one-off cost will include familiarisation with the changes, but continuing costs or a change in customer experience with HMRC is not anticipated.

This measure is not expected to impact on civil society organisations.

Operational impact (£m) (HMRC or other)

Changes to the foreign page of the Self Assessment tax return will be made to ensure that deemed UK dividends and distributions received by remittance basis users will be taxed at the correct rate of tax. These changes are anticipated to cost in the region of £1.8 million. Affected customers will receive support and guidance until such times as the changes can be made.

Other impacts

Other impacts have been considered and none have been identified.

Monitoring and evaluation

The measure will be monitored through disclosures of new avoidance schemes to circumvent the measure, and through communication with affected taxpayers and practitioners.

Further advice

If you have any questions about this change, please contact: cgtbudget@hmrc.gov.uk.