Income tax relief on Capital Loss

Income tax relief on Capital Loss

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Good afternoon all.

I wonder of anyone can help.  I am trying to find out what the position is for income tax relief for shares in a private unquoted business that has gone bust.

I have IR286 and my question is about shares in a  company that has been taken over.  The help sheet is very unclear.  In this situation, the shares were subscribed for at par in X ltd.  It was a trading company.  Two years later X ltd was taken over by Y ltd and new shares were issued in exchange for the old ones so that X became a subsidiary of Y. This was done in order to merge x ltd with another business, so Y ltd became the new holding but also trading company. The shareholders continued to run the business but a new investor came in and subscribed for some shares in Y.The original shareholders were still the majority shareholders.  8 years later Y unfortunately went into liquidation.  

It appears a bit unclear as to whether an income tax deduction is available for the shares in Y ltd.  The only info I can find in the web is from Scotland that appears to say that this loss would be allowable.

Does anyone know the answer?

All relies gratefully received!

Replies (2)

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By Peter The Painter
06th Feb 2012 16:34

Have a look at the legislation.

The answer lies in ITA 2007 section 136.  

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Teignmouth
By Paul Scholes
06th Feb 2012 23:31

Which is?

Hey Peter why stop there?

To be fair to Peter, S136, 135 and the connected Ss 145 & 146 and even further connected provisions of TCGA1992 (also confusingly involving a S135) are not easy to follow and I have been around and around this circle several times in the past and come out not knowing where I had been.

My take on it (and I'm sure/hoping Peter will put me right if necessary) is that you can only link the new shares with the old if there has been no change in your rights, ie the new shares pretty much reflect what you had in the past. The overriding rule is that the share exchange must have taken place for wholly commercial reasons and not as part of a value-shifting, tax avoidance purpose.  This can be difficult to prove one way or the other when you are one of thousands of minority shareholders.

S135 of the 2007 act deals with the subscription rule (which seems to have been fulfilled in company X above) S136 however then examines share exchanges and outlaws these from relief unless one of two conditions is met relating to TCGA 1992.

This is better set out for share issues taking place after 5 April 1998 by Ss 145 & 146 of the 2007 act in which it specifically say that if certain conditions are met the new shares can stand in the place of the old shares.

The conditions are as follows:

•the only issued shares in the new company are subscriber shares and it acquires all the shares in the old company;

•the only consideration given for the old shares is shares in the new company;

•the only consideration for new shares is old shares of a corresponding description (i.e. if they were shares in the same company, they would be of the same class and carry the same rights);

•the new shares of each description are issued to holders of old shares of the corresponding descriptions in proportion to their holdings of the old shares; and

•the exchange is treated as not involving a disposal of the old shares or acquisition of the new shares for CGT purposes, by virtue of TCGA 1992.

Re the last one, Ss 127/135 of TCGA 1992 set out similar considerations for CGT purposes in reorganisations & takeovers and basically say that in a like for like exchange no disposal & acquisition is deemed to have taken place.

So if this is what happened between Y & X and you are happy the shares in X and X itself qualified in all respects with the general rules of S131, 132 & 134 (eg trading UK company under gross assets limit) then, go for it.

PS:  this is as much for my benefit as yours as I've never taken the time to get it all down in writing before.

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