CG64165 - Business Asset Disposal Relief: share exchanges etc. involving QCBs before 6th April 2008 - deferred gains coming back into charge on or after 6th April 2008 - transitional rules

Entrepreneurs’ Relief was renamed in Finance Act 2020 with effect from 6 April 2020.  The new name is generally used in this guidance but should be read as applying to times before that date.

FA2008 Schedule 3 Paragraph 7

FA2008/Sch3/Para7 provides transitional rules to allow claims for relief where:-

• an exchange of shares or securities for qualifying corporate bonds (QCBs) (the “relevant transaction” as in section 116 TCGA) took place before 6 April 2008, but
• a gain deferred in respect of that transaction becomes chargeable on or after 6th April 2008 as a result of a disposal, including by way of redemption, of the QCBs (the “relevant disposal”). The rules under which gains are deferred may be found at CG53820+.

TCGA92/S169R (see CG64160) applies where the exchange of shares or securities for QCBs takes place on or after 6 April 2008. However where that exchange takes place before 6 April 2008, but a deferred gain relating to the exchange comes into charge on or after that date, TCGA92/S169R can have no effect because, at the time of the exchange, Business Asset Disposal Relief did not exist and hence could not be claimed.

Where the gain deferred is in respect of a “relevant transaction” which took place before 6th April 2008 but the “relevant disposal” that brings the deferred gain into charge took place on or after 6th April 2008 the relief may be claimed in respect of that “relevant disposal” if a disposal of the ‘old asset’ (the shares or securities exchanged for the QCBs) would have qualified for that relief on the assumption that Business Asset Disposal Relief had been available at the time of the relevant transaction - FA08/Sch3 /Para7(2).

Relief will be available only to the person who made the exchange. If all or part of the ‘new asset’ (the QCBs) has been transferred to a spouse or civil partner and as a result all or part of the deferred gain subsequently arises to that person, relief will not be available in respect of that part of the deferred gain. If however the ‘new asset’ (or any part) is returned to the investor before the ‘first relevant disposal’, the gain can qualify for relief.

Business Asset Disposal Relief under these transitional rules must be claimed on the first occasion on or after 6 April 2008 when a deferred gain comes into charge (“the first relevant disposal”). Relief (if due) will be given in respect of all deferred gains relating to that same exchange (or “relevant transaction”) that have not come into charge before that date - FA08/Sch3/Para7(3), to the extent that the ‘new asset’ (the QCBs) is held at that time by the person who made the exchange.

If there is a claim to relief under these transitional rules, the gains in respect of which relief is claimed will form part of the claimant’s maximum lifetime limit of gains qualifying for relief.

The time limit for claiming the relief (see CG63970) in respect of the “first relevant disposal” commences at the date that this event occurs.

Where the “first relevant disposal” of QCBs since 6 April 2008 takes place before 23 June 2010.

Where “the first relevant disposal” of QCBs has taken place between 6 April 2008 to 22 June 2010 and a claim to relief was made under the original FA 2008 transitional rules then the entire amount of the “frozen” gain not brought back into charge since 6 April 2008 will be reduced by 4/9.

Any proportion of that deferred gain that had not come into charge before 23 June 2010 will have been reduced by 4/9 as a result of the claim, so a subsequent disposal of QCBs on or after 23 June 2010 will bring such a reduced gain into charge at the normal CGT rate applicable at the time. The Business Asset Disposal Relief rate of 10% will not apply to that reduced deferred gain.

Where the “first relevant disposal” of QCBs since 6 April 2008 takes place on or after 23 June 2010.

F(No.2)A2010/Sch1/Para10 revises these transitional provisions following the change to the way in which the relief is given. The revised approach has effect only in cases where none of the gains deferred as at 6 April 2008 have come into charge from 6 April 2008 to 22 June 2010.

When all or part of a gain deferred before 6 April 2008 first comes into charge on or after 23 June 2010 (because “the first relevant disposal” takes place on or after that date), because of a disposal of all or some of the QCBs, a claim for relief in respect of the gain can be made under the transitional provisions in FA2008/Sch3. Where such a claim is made (and the other conditions for the relief are satisfied at the time of the exchange), the result is that the gain is charged at the Business Asset Disposal Relief rate of 10%.

Calculation

Relief is available in respect of so much of the gain deferred as a result of the “relevant transaction” as has not come into charge before 6 April 2008. So, subject to the lifetime limit of gains qualifying for relief, that amount is then either:

• (for “first relevant disposals” made from 6 April 2008 to 22 June 2010) reduced by 4/9ths and the net amount becomes the amount to be brought into charge in respect of disposals of the “new asset” (the QCBs) on or after 6 April 2008 - FA08/Sch3/Para7 (4) & (5). See example 1 at CG64166.
• (for “first relevant disposals” made on or after 23 June 2010) are brought into charge at the relief rate of 10% in respect of disposals of the “new asset” (the QCBs) made on or after that date - FA08/Sch3/Para7 (4) & (5) as amended by F(No.2)A 2010. See example 2 at CG64166.

Where the whole of the new asset (the QCBs) is not disposed of at the time of the “first relevant disposal” then on each subsequent “relevant disposal” by the individual after 6 April 2008, a proportion of the total amount (net of the relief if the 4/9th reduction applies) comes into charge. That proportion is equivalent to the proportion of the QCBs held at the time of the “first relevant disposal” that are disposed of in the subsequent “relevant disposal” - FA08/Sch3/Para7 (6) & (7).

So if the “first relevant disposal” is of one-third of the QCBs held at that time, one-third of the net gain comes into charge on that occasion. A further proportion of the net gain will come into charge on later “relevant disposals” by the individual, pro rata to the proportion of the QCBs disposed of in each disposal.