A client forgot that he owned some shares in a US company and didn't tell the company when he moved house. After a period of time, when dividend cheques had been returned, the shares were escheated to the State of incorporation of the company. (Delaware, in this case.) The State then sold the shares and my client became entitled to the value of the shares (in US$, of course) at the date of escheatment. No interest is payable by the State on that sum.
A couple of years ago, the client remembered he owned the shares and we eventually found out what had happened to them. The client has just received a cheque for the value of the shares at the date they were escheated.
I now have to work out the tax consequences. The shares were escheated on 1 January 1997. The client obtained a claim form from Delaware in 2011. The cheque has just been received.
What has my client disposed of and when? If I assume that he disposed of the shares on 1 January 1997, the interest bill exceeds the CGT. (Delaware hasn't paid him any interest, although the exchange rate has moved a bit in his favour.) Besides that, it doesn't seem right as he "diposed of" the shares without knowing about it.
Did he dispose of shares in 1997 and acquire a right to compensation? If that right was worth the value of the shares at that point, the result if the same as if he'd simply sold the shares then. Was the right arguably worht very little because he didn't know he had it? So he made a loss/small gain perhaps on the shares in 1997 and acquired a right which he's only just disposed of. I don't think s22 TCGA 1992 applies because that envisages a disposal by one party with no acquisition by the other - but Delaware acquired my client's shares, albeit by operation of law. S268B (compensation for deprivation of foreign assets) doesn't apply either (and, morally, shouldn't in any case).
what's left of my brain is obviously completely befuddled by the detective work involved in establishing the history of the shares. Does anyone have any bright ideas about the correct tax treatment?
EDIT: I should make clear that the State was not holding the sale proceeds on behalf of my client. The funds belonged to the State. He simply had a claim against the State.
Replies (10)
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Not Guilty
He can't dispose of anything "unknowingly", so any disposal only arose for tax purposes when he became aware of the disposal. Delaware in effect held them in trust on his behalf until such time as he made a claim for compensation or became aware of the disposal. The fact that Delaware had already disposed of the shares is irrelevant.
But.........
Delaware compulsorily acquired the shares in 1997, under statute and without the ability to inform the owner. No disposal took place until such time as the owner traced the shares and became entitled to compensation. He couldn't report it until he became aware of it, so it should go on the current return.
date of contract
If I remember my contract law a contract requires offer and acceptance. And until your client knew what had happened he would not have been able to accept it. Therefore the date of the contract, within the meaning of s.28, would be when he accepted the payment.
Or at least that is what I would argue if any HMRC officer said otherwise.
Aren't there two transactions?
1) A disposal (otherwise than by a contract for sale) when the shares passed to the state of Delaware, for which there were no proceeds. See CG13139.
2) A payment of compensation, which had to be claimed in 2011, but which was calculated by reference to the amount that the state of Delaware had (itself) been able to realise for the shares. See CG12940+ onwards, particularly CG12952 and CG12960.
Out of time?
I agree there is a disposal in 1997 but I am not so sure the consideration was nil. Surely a right to compensation arose at that date even if he was not ware of it and even if he had to make a formal claim at a later date? It would have been necessary to value the right at the date it was received at market value on that date, i.e. at full value. One cannot use hindsight to say that the compensation was of limited value because it would not be claimed for many years. After all if he had remembered one day after the sale had taken place he would have received full value at that time.
When compensation is received there is no gain apart from currency movement
As the client has not acted fraudulently (careless perhaps), the time limit to assess is only 6 years and so it is too late to assess the original gain.