CG52637 - Share exchange: Share exchanges involving non-UK incorporated close companies

Where an exchange involves the issue of shares or securities (“securities” in the following guidance) in a non-UK company in exchange for this in a UK company then there is an additional rule that applies where the issue happens on or after 17 November 2022.  The rule also applies to securities issued on a scheme of reconstruction under TCGA92/S136.

The effect of the rule is to treat the new securities as being located in the UK which means that that the remittance basis of taxation will not apply to any gains on a future disposal.  Nor will income from the securities be treated as relevant foreign income, ITTOIA05/S830(3A).

The rule applies where both the UK and non-UK companies are “close companies” and the issue is to an individual who is a “participator” in both companies.  The rule applies the relevant definitions in Chapter 2 of Part 10 of CTA 2010.  In addition, the rule only applies to participator who, together with their “associates”, holds greater than 5% “material interest” in each company.

It is possible to elect for this rule not to apply which will result in a gain or loss being triggered at the time of the exchange.

This sets out the circumstances in which the rule applies, as described above.  In addition to using the CTA 2010 definitions, this explains the meaning of a “material interest” which is –

• Holding or being able to control more than 5% of the ordinary share capital of a company, or
• Possessing or being entitled to acquire a right to more than 5% of the assets of the company, in a winding up or otherwise.

Where a company does not have ordinary share capital then members’ interests are taken into account.

This sets out the consequence of the rule applying, which is that the issued securities are then treated as being located in the UK.  The treatment also applies  -

• Where the securities are transferred to a spouse or civil partner on a no gain/no loss basis, TCGA92/S58. 
• To further securities of the non-UK company issued to an affected individual,
• To securities of another company issued in circumstances where the relevant conditions of TCGA92/S138A apply in regard to that company,
• To replacement securities acquired under a repo or stock lending arrangement.

An individual may elect to disapply the effect of the rule with the result that the share reorganisation rules will not apply and the securities in the UK company will be treated as having been disposed of at the time of the exchange or scheme of reconstruction.  The time limit for making the election is the 31 January following the tax year in which the securities of the non-UK company are issued.