IFM16330 - Scheme of reconstruction involving issue of shares

Section 136 Taxation of Chargeable Gains Act 1992 (TCGA)

This section applies where all of the following apply.

1. An arrangement is entered into between investment fund ’A’ and:

• the persons holding shares in ‘A’, or
• where there are different classes of shares in ‘A’, the persons holding any class of those shares.

2. The arrangement is entered into for the purposes of, or in connection with, a scheme of reconstruction.

3. Under the arrangement:

• another investment fund ‘B’ issues shares to those persons in respect of and in proportion to (or as nearly in proportion to) their relevant holding in ‘A’, and
• the shares of ‘A’ comprised in relevant holdings are retained by those persons or are cancelled or extinguished.

If this section applies:

• Persons are treated as having replaced their ‘A’ shares with ‘B’ shares.
• Chargeable gains rules apply as if investment funds ‘A’ and ‘B’ were a single company which had reorganised its share capital - see CG51700C. In summary, the exchange of shares in ‘A’ for shares in B’ is treated as not a disposal for chargeable gains purposes and the ‘B’ shares are treated as having been acquired at the same time as the original ‘A’ shares.

Where a reorganisation the share capital of ‘A’ is carried out for the purposes of the reconstruction takes place in advance of the reconstruction, the provisions of section 136 apply to the position after the reorganisation.

Section 103H only applies where the arrangements take place for bona fide commercial reasons and not for the avoidance of tax– see IFM16260.

‘Scheme of reconstruction’ is defined in Schedule 5AA to TCGA – see IFM16340.