VCM75390 - Share Loss Relief: individual and corporate claimants: individual claimants: more complex cases: disposals of new shares (general case)
Introduction - section 127 TCGA 1992
The effect of ITA07/S136
Summary table
Introduction - section 127 TCGA 1992
There are a number of situations in which an individual can come to own shares which, on their own or taken together with others, are treated for TCGA purposes as being the same asset as other shares which they previously owned. In other words, for the purposes of computing chargeable gains and allowable losses, new shares received in certain types of transaction may be identified with old shares previously (or still) held. This is one of the effects of TCGA92/S127.
The other principal effect is that for TCGA purposes there is no disposal of the old shares and no acquisition of the new shares. So no chargeable gain and no allowable loss will accrue on a transaction to which TCGA92/S127 applies, and when the new shares are disposed of it will be necessary to consider the history of the old shares, including their cost and date of acquisition, in order to determine any gain or loss.
The following are common transactions to which TCGA92/S127 may apply.
| Transaction | Outcome |
|---|---|
| Bonus issues in which a holder of old shares receives new shares issued to him or her by the same company in proportion to the holding of old shares. | The new bonus shares and the old shares (which are still held), taken together, are treated as the same asset as the old shares (again taken together). |
| Rights issues in which a holder of old shares is entitled to receive new shares issued to him or her by the same company in proportion to the holding of old shares, but on payment of new consideration. | The new shares and the old shares (which are still held), taken together, are treated as the same asset as the old shares (again taken together). |
| Conversions or amendments to a class of share. | A company may alter its share capital by changing the rights attaching to an entire class of share, or by cancelling all shares in a particular class and issuing new shares to the holders. An example of the latter would be a company with a very large number of 0.1p ordinary shares in issue: they could cancel those shares and issue new 10p ordinary shares on a ‘one for 100’ basis. The new shares are treated as the same asset, and acquired at the same time and for the same cost as, the old shares. |
| Share for share exchanges. | A company (B) might acquire the issued share capital of another company (A) by offering to issue new shares to the holder of A’s shares in return for them surrendering their holdings. The resulting holding of B’s shares will be treated as the same asset as the shares in A. |
| Demergers by transfers of a business. | A company (D) may transfer all or part of its business to another company (or to more than one other company) so that D receives no consideration itself but D’s shareholders receive new shares issued to them by the successor company or companies. All the new shares, along with the original shares in D, taken together are treated as the same asset as the old D shares. |
In each of these situations, the ‘same asset’ and ‘no disposal or acquisition’ fictions imposed by TCGA92/S127 apply only for the purposes of that Act. They cannot automatically be assumed to apply also for the purposes of the Share Loss Relief rules in ITA 2007 or CTA 2010.
The effect of ITA07/S136
In all of the situations in which TCGA92/S127 applies the question may arise of whether the shareholder is eligible for Share Loss Relief in respect of the new shares when they are disposed of. The principal question will still be whether the shares disposed of are qualifying shares under ITA07/S131(2) (see VCM71020, also VCM73040 and VCM74060), but ITA07/S136 may pre-empt that question.
Section 136 applies where an individual disposes of ‘new shares’ and those new shares are identified with other shares (‘old shares’) previously but no longer held by the same individual by virtue of TCGA92/S127. It does not determine whether the new shares are qualifying shares or not, but says that an individual is not ‘eligible for Share Loss Relief’ on the disposal of the new shares unless one of two conditions is met. So if one or both conditions are met the shareholder is eligible for relief, but the actual availability of relief must still be decided by reference to whether the new shares are qualifying shares and the other relevant conditions. If neither condition is met then the shareholder cannot get Share Loss Relief in respect of the new shares in any circumstances (though any allowable loss will still be available for relief against chargeable gains).
The first condition (A) is that the individual would have been eligible for Share Loss Relief on a disposal of the old shares if they had incurred an allowable loss in disposing of the old shares by way of a bargain at arm’s length on the occasion of the disposal that would have occurred but for the effect of TCGA92/S127. In other words, consider a hypothetical arm’s length disposal of the old shares at the time of the transaction to which section 127 applies, and if an allowable loss on that disposal would have been eligible for Share Loss Relief then the shareholder will be eligible in respect of the new shares when they are disposed of.
The second condition (B) is that the individual gave consideration for the new shares in money or money’s worth of a kind other than the surrender, cancellation or alteration of the old shares, and other than any assets of the issuing company or entitlement to unpaid dividends declared out of those assets. Where this condition is relied upon, the amount of Share Loss Relief in respect of the new shares is limited to the amount or value of the new consideration taken into account when computing the allowable loss on their disposal.
Summary table
The following table summarises the normal operation of ITA07/S136 in each of the common types of transaction to which TCGA92/S127 usually applies.
| Transaction/CG Manual reference | S136 condition A met? | S136 condition B met? | Notes |
|---|---|---|---|
| Bonus issue CG51700+, CG51746 | S136 not in point \n(the old shares are still held) | S136 not in point \n(the old shares are still held) | S135(4) may deem the bonus shares to have been subscribed for. |
| Rights issue CG51700+CG51746 | S136 not in point \n(the old shares are still held) | S136 not in point \n(the old shares are still held) | Check consideration given is not one of the excluded types (TCGA92/S128(2)(a)(b)) |
| Share conversion or replacement CG51700+ | Yes if old shares were qualifying shares and other conditions met; otherwise no | No \n(no consideration given) | - |
| Share for share exchange CG52521+ | Yes if old shares were qualifying shares and other conditions met; otherwise no | No | But S145 may disapply S136 altogether. |
| Demerger or other scheme of reconstruction CG52761+ | (S136 only in point if old shares cancelled). Yes if old shares were qualifying shares and other conditions met; otherwise no | (S136 only in point if old shares cancelled). Usually no | Consideration not generally given by shareholders in such schemes. |