CG17916 - Taper relief: anti-avoidance rules: Freezing - limited exposure: Taper relief does not apply to disposals before 6 April 1998 or after 6 April 2008

TCGA92/SCHA1/PARA10

TCGA92/SCHA1/PARA10 prevents any attempt to increase taper relief by continuing to hold an asset while entering into a transaction that limits exposure to the economic effects of holding the asset. It treats any period in which the holder of the asset, or a relevant predecessor, had limited exposure to fluctuations in the value of the asset as a period that does not count for taper relief. Two particular types of transaction do not trigger the operation of the paragraph.

PERIODS OF LIMITED EXPOSURE

A person holding an asset is taken as having limited exposure to fluctuations in value where a transaction entered into at any time, whether before or after 6 April 1998, by that person, or by a relevant predecessor of that person, had the effect that he or she

• was not exposed, or not exposed to any substantial extent, to the risk of loss from fluctuations in the value of the asset

and

• was not able to enjoy, or to enjoy to any substantial extent, any opportunities to benefit from such fluctuations

during some part of what would otherwise be the qualifying holding period. Both of these conditions must be met before paragraph 10 applies.

RELEVANT PREDECESSOR

A relevant predecessor is defined by paragraphs 10(4) and (5) as any other person who held the asset at any time during the period that is treated for taper relief purposes as the period during which the asset was held by the person making the disposal. This period will include the period of ownership of the spouse or civil partner where the asset was acquired at no gain/no loss under TCGA92/S58, see CG17906. Typically the relevant predecessor will be the spouse or civil partner of the person making the disposal. For this purpose the limitation in the period of ownership to periods after 5 April 1998 is ignored so that paragraph 10 can apply where the transaction took place before that date.

SUBSTANTIAL EXTENT

Paragraph 10 applies where the relevant transaction entirely removes the exposure to fluctuations in the value of the asset or the holder is no longer exposed to any substantial extent. Substantial should, in general terms, be taken to mean greater than 20 per cent, so that paragraph 10 will apply where someone has divested themselves of at least 80 per cent of the exposure to future changes in value. Where the application of this rule is not clear on the facts of your particular case a report should be sent to Capital Gains Technical Group together with your papers.

EXCEPTION FOR PARTICULAR TRANSACTIONS

Paragraph 10(3) disapplies paragraph 10 in relation to 2 types of transaction that might otherwise have been regarded as resulting in limited exposure to fluctuations in value. These are:

• taking out an insurance policy against either the loss of the relevant asset, or damage to it, or both, which is a policy of a type that the person holding the asset might reasonably have been expected to enter into; or
• entering into a transaction to protect the holder of the asset from fluctuations in the value of the asset resulting only from fluctuations in the value of foreign currency.

• THE EXCHANGE OF SHARES FOR LOAN NOTES

In a take-over, shares in one company may be exchanged for loan notes (which are not qualifying corporate bonds) in a different company in such a way that TCGA92/S135 applies the same asset rule in TCGA92/S127, see CG52500+. The loan notes are treated as the same asset as the shares for which they were exchanged. As loan notes will typically not bear the same degree of exposure to fluctuations in value as the shares for which they were exchanged it might be thought that paragraph 10 applies to treat the exchange as a transaction which has the effect of limiting exposure to fluctuations in value. In practice, however, where the loan notes are issued as part of the normal commercial arrangements in an exchange the Inland Revenue do not consider that paragraph 10 applies. This will usually be so even where the loan notes are underwritten by a third party guarantee (for example a bank guarantee) as part of those arrangements. In more complex or non-commercial circumstances, where the loan notes are issued to exploit the operation of taper paragraph 10 may however apply. If you consider taper relief should be restricted for this reason you should make a report to Capital Gains Technical Group enclosing your papers.