.png)
.png)
Some five years ago, our client subscribed £50,000 for ordinary shares in a private trading company (S), of which he became a director. Two years ago, and at a time when S was still solvent, the company's accountants recommended that a new holding company (H) should be formed, and S became a wholly owned subsidiary after a share for share exchange. Section 138, Taxation of Chargeable Gains Act 1992 clearance was applied for and granted.
Some five years ago, our client subscribed £50,000 for ordinary shares in a private trading company (S), of which he became a director. Two years ago, and at a time when S was still solvent, the company's accountants recommended that a new holding company (H) should be formed, and S became a wholly owned subsidiary after a share for share exchange. Section 138, Taxation of Chargeable Gains Act 1992 clearance was applied for and granted. S continued trading but, at the end of last year, both it and H went into administrative receivership and it is now certain that our client could enter a negligible value claim. We would much prefer to take the section 574, Taxes Act 1988 route, but the problem is that the starting point for the claim (the quantum of the capital gains tax loss) concerns shares in H which were not subscribed for.
Do readers feel that the following argument has a chance of success? Section 135, Taxation of Chargeable Gains Act 1992 tells us to pretend that no disposal took place and that the new shareholding effectively inherits the historical details of the old. Could the latter encompass the fact of a subscription and lead to a competent section 574 claim for our client's shares in H?
At no time during the period of their ownership could the shares of S have been treated as becoming of negligible value.
(Query T15,830) – UCM.
Section 135, Taxation of Chargeable Gains Act 1992 brings ibid., section 127 into play if certain conditions are fulfilled on an exchange of shares. Section 127 then says that 'the new holding ... shall be treated as the same asset acquired as the original shares were acquired'. This goes further than saying that the new shares inherit the historical details of the old. It says that they are treated as if they were the same asset – so far so good, for capital gains tax.
We then turn to section 574, Taxes Act 1988. It contains no reference to sections 127, 135 or any of the other sections dealing with share exchanges. However, section 575 deals with situations where section 574 will not apply. I always find it ironic that you look for inclusions in a section that is headed exclusions. The double negative lives on. Section 575(2) allows relief in two circumstances if, on an exchange governed by section 127, a loss could have been claimed or new consideration was given. Section 575(3) denies relief if, on a transfer of shares, section 137, Taxation of Chargeable Gains Act 1992 applied. Since a clearance was obtained, section 137 did not apply.
Since section 575, Taxes Act 1988 sets out occasions where section 574 may be affected by an exchange of shares, 'UCM' should be assured that there will be occasions where section 574 will apply; otherwise why exclude some bits? – New Road.
There is an old proverb about being unable to see a wood if one is in among the trees, and that seems to be happening here. If H Ltd were an established company, seeking to take over S Ltd, offering its members H shares for S ones, those who accepted would indeed become owners of shares for which they did not subscribe. This is because of not being the initial members of H Ltd. But that is not what happened here.
The client is one of the individuals who actually formed H Ltd, who therefore (quite literally) subscribed to its initial share issue, and who paid for their allotments in kind, by delivering up their S shares. They did not exchange their shares; they used them as money.
The client is already home and dry. – Man of Kent.
