Section 44(2)
1 The following Schedule is inserted after Schedule 7AB to the Taxation of Chargeable Gains Act 1992 (c. 12)—
1 (1) A gain accruing to a company (“the investing company”) on a disposal of shares or an interest in shares in another company (“the company invested in”) is not a chargeable gain if the requirements of this Schedule are met.
(2) The requirements are set out in—
Part 2 (the substantial shareholding requirement), and
Part 3 (requirements to be met in relation to the investing company and the company invested in).
(3) The exemption conferred by this paragraph does not apply in the circumstances specified in paragraph 5 or the cases specified in paragraph 6.
2 (1) A gain accruing to a company (“company A”) on a disposal of an asset related to shares in another company (“company B”) is not a chargeable gain if either of the following conditions is met.
(2) The first condition is that—
(a) immediately before the disposal company A holds shares or an interest in shares in company B, and
(b) any gain accruing to company A on a disposal at that time of the shares or interest would, by virtue of paragraph 1, not be a chargeable gain.
(3) The second condition is that—
(a) immediately before the disposal company A does not hold shares or an interest in shares in company B but is a member of a group and another member of that group does hold shares or an interest in shares in company B, and
(b) if company A, rather than that other company, held the shares or interest, any gain accruing to company A on a disposal at that time of the shares or interest would, by virtue of paragraph 1, not be a chargeable gain.
(4) Where assets of a company are vested in a liquidator under section 145 of the Insolvency Act 1986 or Article 123 of the Insolvency (Northern Ireland) Order 1989 or otherwise, this paragraph applies as if the assets were vested in, and the acts of the liquidator in relation to the assets were the acts of, the company (acquisitions from or disposals to him by the company being disregarded accordingly).
(5) The exemption conferred by this paragraph does not apply in the circumstances specified in paragraph 5 or the cases specified in paragraph 6.
3 (1) A gain accruing to a company (“company A”) on a disposal of shares, or an interest in shares or an asset related to shares, in another company (“company B”) is not a chargeable gain if the following conditions are met.
(2) The conditions are—
(a) that at the time of the disposal company A meets the requirement in paragraph 7 (the substantial shareholding requirement) in relation to company B;
(b) that a chargeable gain or allowable loss would, apart from this paragraph, accrue to company A on the disposal (but see sub-paragraph (3) below);
(c) that at the time of the disposal—
(i) company A is resident in the United Kingdom, or
(ii) any chargeable gain accruing to company A on the disposal would, by virtue of section 10(3), form part of that company’s chargeable profits for corporation tax purposes;
(d) that there was a time within the period of two years ending with the disposal (“the relevant period”) when, if—
(i) company A, or
(ii) a company that at any time in the relevant period was a member of the same group as company A,
had disposed of shares or an interest in shares in company B that it then held, a gain accruing would, by virtue of paragraph 1, not have been a chargeable gain; and
(e) that, if at the time of the disposal the requirements of paragraph 19 (requirements relating to company invested in) are not met in relation to company B, there was a time within the relevant period when company B was controlled by—
(i) company A, or
(ii) company A together with any persons connected with it, or
(iii) a company that at any time in the relevant period was a member of the same group as company A, or
(iv) any such company together with any persons connected with it.
(3) Sub-paragraph (1) does not apply if—
(a) the condition in sub-paragraph (2)(b) is met but would not be met but for a failure to meet the requirement in paragraph 18(1)(b) (requirement as to investing company to be met immediately after the disposal), and
(b) the failure to meet that requirement is not due to—
(i) the fact that company A has been wound up or dissolved, or
(ii) where the winding up or dissolution takes place as soon as is reasonably practicable in the circumstances, the fact that company A is about to be wound up or dissolved.
(4) In determining for the purpose of sub-paragraph (2)(d) whether a gain accruing on the hypothetical disposal referred to would have been a chargeable gain, the requirements of paragraph 18(1)(b) and of paragraph 19(1)(b) (requirement as to company invested in to be met immediately after the disposal) shall be assumed to be met.
(5) Where—
(a) immediately before the disposal company B holds an asset,
(b) the expenditure allowable in computing any gain or loss on that asset, were it to be disposed of by company B immediately before that disposal, would fall to be reduced because of a claim to relief under section 165 (gifts relief) in relation to an earlier disposal, and
(c) that earlier disposal took place within the relevant period,
sub-paragraph (1) does not prevent a gain accruing to company A on the disposal from being a chargeable gain but any loss so accruing is not an allowable loss.
(6) Where assets of company B are vested in a liquidator under section 145 of the Insolvency Act 1986 or Article 123 of the Insolvency (Northern Ireland) Order 1989 or otherwise, sub-paragraph (5)(a) applies as if the assets were vested in the company.
(7) In determining “the relevant period” for the purposes of sub-paragraph (2)(d) or (e) or sub-paragraph (5)(c), section 28 (time of disposal under contract) applies with the omission of subsection (2) (postponement of time of disposal in case of conditional contract).
(8) The exemption conferred by this paragraph does not apply in the circumstances specified in paragraph 5 or the cases specified in paragraph 6.
4 (1) For the purposes of determining whether an exemption conferred by this Schedule applies, the question whether there is a disposal shall be determined without regard to—
(a) section 116(10) (reorganisation, conversion of securities, etc treated as not involving disposal),
(b) section 127 (share reorganisations etc treated as not involving disposal), or
(c) section 192(2)(a) (distribution not treated as capital distribution).
(2) Sub-paragraph (1) does not apply to a disposal of shares if the effect of its applying would be that relief attributable to the shares under Schedule 15 to the Finance Act 2000 (corporate venturing scheme) would be withdrawn or reduced under paragraph 46 of that Schedule (withdrawal or reduction of investment relief on disposal of shares).
(3) Where or to the extent that an exemption conferred by this Schedule does apply—
(a) the provisions mentioned in sub-paragraph (1)(a) and (b) do not apply in relation to the disposal, and
(b) the provision mentioned in sub-paragraph (1)(c) does not apply in relation to the subject matter of the disposal.
(4) Where section 127 is disapplied by sub-paragraph (3)(a) in a case in which that section would otherwise have applied in relation to the disposal by virtue of paragraph 84 of Schedule 15 to the Finance Act 2000 (corporate venturing scheme: share exchanges), paragraph 85 of that Schedule (attribution of relief to new shares) does not apply.
(5) In this paragraph any reference to section 127 includes a reference to that provision as applied by any enactment relating to corporation tax.
5 (1) Where in pursuance of arrangements to which this paragraph applies—
(a) an untaxed gain accrues to a company (“company A”) on a disposal of shares, or an interest in shares or an asset related to shares, in another company (“company B”), and
(b) before the accrual of that gain—
(i) company A acquired control of company B, or the same person or persons acquired control of both companies, or
(ii) there was a significant change of trading activities affecting company B at a time when it was controlled by company A, or when both companies were controlled by the same person or persons,
none of the exemptions in this Schedule applies to the disposal.
(2) This paragraph applies to arrangements from which the sole or main benefit that (but for this paragraph) could be expected to arise is that the gain on the disposal would, by virtue of this Schedule, not be a chargeable gain.
(3) For the purposes of sub-paragraph (1)(a) a gain is “untaxed” if the gain, or all of it but a part that is not substantial, represents profits that have not been brought into account (in the United Kingdom or elsewhere) for the purposes of tax on profits for a period ending on or before the date of the disposal.
(4) The reference in sub-paragraph (3) to profits being brought into account for the purposes of tax on profits includes a reference to the case where—
(a) an amount in respect of those profits is apportioned to a company resident in the United Kingdom by virtue of subsection (3) of section 747 of the Taxes Act 1988 (imputation of chargeable profits etc of controlled foreign companies), and
(b) a sum is chargeable on that company in respect of that amount by virtue of subsection (4) of that section for an accounting period of that company ending on or before the date of the disposal.
(5) For the purposes of sub-paragraph (1)(b)(ii) there is a “significant change of trading activities affecting company B” if—
(a) there is a major change in the nature or conduct of a trade carried on by company B or a 51% subsidiary of company B, or
(b) there is a major change in the scale of the activities of a trade carried on by company B or a 51% subsidiary of company B, or
(c) company B or a 51% subsidiary of company B begins to carry on a trade.
(6) In this paragraph—
“arrangements” includes any scheme, agreement or understanding, whether or not legally enforceable;
“major change in the nature or conduct of a trade” has the same meaning as in section 768 of the Taxes Act (change of ownership of company: disallowance of trading losses);
“profits” means income or gains (including unrealised income or gains).
6 (1) The exemptions conferred by this Schedule do not apply—
(a) to a disposal that by virtue of any enactment relating to chargeable gains is deemed to be for a consideration such that no gain or loss accrues to the person making the disposal,
(b) to a disposal a gain on which would, by virtue of any enactment not contained in this Schedule, not be a chargeable gain, or
(c) to a deemed disposal under section 440(1) or (2) of the Taxes Act (deemed disposal on transfer of asset of insurance company from one category to another).
(2) The hypothetical disposal referred to in paragraph 2(2)(b) or (3)(b) or paragraph 3(2)(d) shall be assumed not to be a disposal within sub-paragraph (1)(a), (b) or (c) above.
7 The investing company must have held a substantial shareholding in the company invested in throughout a twelve-month period beginning not more than two years before the day on which the disposal takes place.
8 (1) For the purposes of this Schedule a company holds a “substantial shareholding” in another company if it holds shares or interests in shares in that company by virtue of which—
(a) it holds not less than 10% of the company’s ordinary share capital,
(b) it is beneficially entitled to not less than 10% of the profits available for distribution to equity holders of the company, and
(c) it would be beneficially entitled on a winding up to not less than 10% of the assets of the company available for distribution to equity holders.
This is without prejudice to what is meant by “substantial” where the word appears in other contexts.
(2) Schedule 18 to the Taxes Act 1988 (meaning of equity holder and determination of profits or assets available for distribution) applies for the purposes of sub-paragraph (1).
(3) In that Schedule as it applies for those purposes—
(a) for any reference to sections 403C and 413(7) of that Act, or either of those provisions, substitute a reference to sub-paragraph (1) above;
(b) omit the words in paragraph 1(4) from “but” to the end;
(c) omit paragraph 5(3) and paragraphs 5B to 5F; and
(d) omit paragraph 7(1)(b).
9 (1) For the purposes of paragraph 7 (the substantial shareholding requirement) a company that is a member of a group is treated—
(a) as holding any shares or interest in shares held by any other company in the group, and
(b) as having the same entitlement as any such company to any rights enjoyed by virtue of holding shares or an interest in shares.
(2) Sub-paragraph (1) is subject to paragraph 17(4) (exclusion of aggregation in case of assets of long-term insurance fund of insurance company).
10 (1) For the purposes of this Part the period for which a company has held shares is treated as extended by any earlier period during which the shares concerned, or shares from which they are derived, were held—
(a) by a company from which the shares concerned were transferred to the first-mentioned company on a no-gain/ no-loss transfer, or
(b) by a company from which the shares concerned, or shares from which they are derived, were transferred on a previous no-gain/no-loss transfer—
(i) to a company within paragraph (a), or
(ii) to another company within this paragraph.
(2) For the purposes of sub-paragraph (1)—
(a) a “no-gain/no-loss transfer” means a disposal and corresponding acquisition that by virtue of any enactment relating to chargeable gains are deemed to be for a consideration such that no gain or loss accrues to the person making the disposal;
(b) a transfer shall be treated as if it had been a no-gain/no- loss transfer if it is a transfer to which subsection (1) of section 171 (transfers within a group) would apply but for subsection (3) of that section.
(3) Where sub-paragraph (1) applies to extend the period for which a company (“company A”) is treated as having held any shares, that company shall be treated for the purposes of this Part as having had at any time the same entitlement—
(a) to shares, and
(b) to any rights enjoyed by virtue of holding shares,
as the company (“company B”) that at that time held the shares concerned or, as the case may be, the shares from which they are derived.
(4) The shares and rights to be so attributed to company A include any holding or entitlement attributed at that time to company B under paragraph 9 (aggregation of holdings of group companies).
(5) In this paragraph, except in paragraphs (a) to (c) of sub-paragraph (6), “shares” includes an interest in shares.
(6) For the purposes of this paragraph shares are “derived” from other shares only where—
(a) a company becomes a co-owner of shares previously owned by it alone, or vice versa,
(b) a company’s interest in shares as co-owner changes (without the company ceasing to be a co-owner),
(c) one holding of shares is treated by virtue of section 127 as the same asset as another, or
(d) there is a sequence of two or more of the occurrences mentioned in paragraphs (a) to (c).
The reference in paragraph (c) to section 127 includes a reference to that provision as applied by any enactment relating to corporation tax.
11 (1) For the purposes of this Part a company is not regarded as having held shares throughout a period if, at any time during that period, there is a deemed disposal and reacquisition of—
(a) the shares concerned, or
(b) shares, or an interest in shares, from which those shares are derived.
(2) For the purposes of this Part a company is not regarded as having held an interest in shares throughout a period if, at any time during that period, there is a deemed disposal and reacquisition of—
(a) the interest concerned, or
(b) shares, or an interest in shares, from which that interest is derived.
(3) In this paragraph—
“deemed disposal and reacquisition” means a disposal and immediate reacquisition treated as taking place under any enactment relating to corporation tax;
“derived” has the same meaning as in paragraph 10.
12 (1) This paragraph applies where—
(a) a company that holds shares in another company transfers the shares under a repurchase agreement, and
(b) by virtue of section 263A(1) (agreements for sale and repurchase of securities) the disposal is disregarded for the purposes of the enactments relating to chargeable gains.
(2) During the period of the repurchase agreement—
(a) the original owner shall be treated for the purposes of this Part as continuing to hold the shares transferred and accordingly as retaining his entitlement to any rights attached to them, and
(b) the interim holder shall be treated for those purposes as not holding the shares transferred and as not becoming entitled to any such rights.
This is subject to the following qualification.
(3) If at any time before the end of the period of the repurchase agreement the original owner, or another member of the same group as the original owner, becomes the holder—
(a) of any of the shares transferred, or
(b) of any shares directly or indirectly representing any of the shares transferred,
sub-paragraph (2) does not apply after that time in relation to those shares or, as the case may be, in relation to the shares represented by those shares.
(4) In this paragraph a “repurchase agreement” means an agreement under which—
(a) a person (“the original owner”) transfers shares to another person (“the interim holder”) under an agreement to sell them, and
(b) the original owner or a person connected with him is required to buy them back either—
(i) in pursuance of an obligation to do so imposed by that agreement or by any related agreement, or
(ii) in consequence of the exercise of an option acquired under that agreement or any related agreement.
For the purposes of paragraph (b) agreements are related if they are entered into in pursuance of the same arrangements (regardless of the date on which either agreement is entered into).
(5) Any reference in this paragraph to the period of a repurchase agreement is to the period beginning with the transfer of the shares by the original owner to the interim holder and ending with the repurchase of the shares in pursuance of the agreement.
13 (1) This paragraph applies where—
(a) a company that holds shares in another company transfers the shares under a stock lending arrangement, and
(b) by virtue of section 263B(2) (stock lending arrangements) the disposal is disregarded for the purposes of the enactments relating to chargeable gains.
(2) During the period of the stock lending arrangement—
(a) the lender shall be treated for the purposes of this Part as continuing to hold the shares transferred and accordingly as retaining his entitlement to any rights attached to them, and
(b) the borrower shall be treated for those purposes as not holding the shares transferred and as not becoming entitled to any such rights.
This is subject to the following qualification.
(3) If at any time before the end of the period of the stock lending arrangement the lender, or another member of the same group as the lender, becomes the holder—
(a) of any of the shares transferred, or
(b) of any shares directly or indirectly representing any of the shares transferred,
sub-paragraph (2) does not apply after that time in relation to those shares or, as the case may be, in relation to the shares represented by those shares.
(4) In this paragraph a “stock lending arrangement” means arrangements between two persons (“the borrower” and “the lender”) under which—
(a) the lender transfers shares to the borrower otherwise than by way of sale, and
(b) a requirement is imposed on the borrower to transfer those shares back to the lender otherwise than by way of sale.
(5) Any reference in this paragraph to the period of a stock lending arrangement is to the period beginning with the transfer of the shares by the lender to the borrower and ending—
(a) with the transfer of the shares back to the lender in pursuance of the arrangement, or
(b) when it becomes apparent that the requirement for the borrower to make a transfer back to the lender will not be complied with.
(6) The following provisions apply for the purposes of this paragraph as they apply for the purposes of section 263B—
(a) subsections (5) and (6) of that section (references to transfer back of securities to include transfer of other securities of the same description);
(b) section 263C (references to transfer back of securities to include payment in respect of redemption).
14 (1) This paragraph applies where shares in one company (“company X”)—
(a) are exchanged (or deemed to be exchanged) for shares in another company (“company Y”), or
(b) are deemed to be exchanged by virtue of section 136 for shares in company X and shares in another company (“company Y”),
in circumstances such that, under section 127 as that section applies by virtue of section 135 or 136, the original shares and the new holding are treated as the same asset.
(2) Where company Y—
(a) is the company invested in, and is accordingly the company by reference to which the requirement of paragraph 7 (the substantial shareholding requirement) falls to be met, or
(b) is a company by reference to which, by virtue of this paragraph, that requirement may be met, or
(c) is a company by reference to which, by virtue of paragraph 15 (effect of earlier demerger) that requirement may be met,
that requirement may instead be met, in relation to times before the exchange (or deemed exchange), by reference to company X.
(3) If in any case that requirement can be met by virtue of this paragraph (or by virtue of this paragraph together with paragraph 15), it shall be treated as met.
(4) In sub-paragraph (1) “original shares” and “new holding” shall be construed in accordance with sections 126, 127, 135 and 136.
15 (1) This paragraph applies where shares in one company (“the subsidiary”) are transferred by another company (“the parent company”) on a demerger.
(2) Where the subsidiary—
(a) is the company invested in, and is accordingly the company by reference to which the requirement of paragraph 7 (the substantial shareholding requirement) falls to be met, or
(b) is a company by reference to which, by virtue of this paragraph, that requirement may be met, or
(c) is a company by reference to which, by virtue of paragraph 14 (effect of earlier company reconstruction etc), that requirement may be met,
that requirement may instead be met, in relation to times before the transfer, by reference to the parent company.
(3) If in any case that requirement can be met by virtue of this paragraph (or by virtue of this paragraph together with paragraph 14), it shall be treated as met.
(4) In this paragraph a “transfer of shares on a demerger” means a transfer such that, by virtue of section 192(2)(b), sections 126 to 130 apply as if the parent company and the subsidiary were the same company and the transfer were a reorganisation of that company’s share capital not involving a disposal or acquisition.
16 Where assets of the investing company, or of a company that is a member of the same group as the investing company, are vested in a liquidator under section 145 of the Insolvency Act 1986 or Article 123 of the Insolvency (Northern Ireland) Order 1989 or otherwise, this Part applies as if the assets were vested in, and the acts of the liquidator in relation to the assets were the acts of, the company (acquisitions from or disposals to him by the company being disregarded accordingly).
17 (1) In the following two cases paragraph 8(1) (meaning of substantial shareholding) has effect as if, in paragraphs (a), (b) and (c), “30%” were substituted for “10%”.
(2) The first case is where the investing company is an insurance company and the disposal is of an asset of its long-term insurance fund.
(3) The second case is where—
(a) the investing company is a 51% subsidiary of an insurance company, and
(b) the insurance company holds as an asset of its long-term insurance fund shares or an interest in shares—
(i) in the investing company, or
(ii) in another company through which it owns shares in the investing company.
The reference in paragraph (b)(ii) to owning shares through another company has the same meaning as in section 838 of the Taxes Act (subsidiaries).
(4) Where the investing company is a member of a group that includes an insurance company, paragraph 9 (aggregation of holdings of group companies) does not apply in relation to shares or an interest in shares held by the insurance company as assets of its long-term insurance fund.
(5) In this paragraph “insurance company” and “long-term insurance fund” have the meanings given by section 431(2) of the Taxes Act.
18 (1) The investing company must—
(a) have been a sole trading company or a member of a qualifying group throughout the period (“the qualifying period”)—
(i) beginning with the start of the latest twelve-month period by reference to which the requirement of paragraph 7 (the substantial shareholding requirement) is met, and
(ii) ending with the time of the disposal, and
(b) be a sole trading company or a member of a qualifying group immediately after the time of the disposal.
(2) For this purpose a “qualifying group” means—
(a) a trading group, or
(b) a group that would be a trading group if the activities of any group member that is not established for profit were disregarded to the extent that they are carried on otherwise than for profit.
In determining whether a company is established for profit, no account shall be taken of any object or power of the company that is only incidental to its main objects.
(3) The requirement in sub-paragraph (1)(a) is met if the investing company was a sole trading company for some of the qualifying period and a member of a qualifying group for the remainder of that period.
(4) The requirement in sub-paragraph (1)(a) is treated as met if at the time of the disposal—
(a) the investing company is a member of a group, and
(b) there is another member of the group in relation to which that requirement would have been met if—
(i) the subject matter of the disposal had been transferred to it immediately before the disposal in circumstances in which section 171(1) (transfers within a group) applied, and
(ii) it had made the disposal.