CG53080 - Substantial shareholdings exemption: the substantial shareholding requirement - aggregation of periods when shares held

TCGA92/SCH7AC/PARA10, TCGA92/SCH7AC/PARA11, TCGA92/SCH7AC/PARA14 & TCGA92/SCH7AC/PARA15

Part 2 of Schedule 7AC provides that

• where shares have been acquired by way of a no gain/no loss transfer, or
• where section 127 TCGA 1992 operates so that, on a reorganisation of share capital an exchange of shares that is treated as involving no disposal of the old shares or acquisition of the new shares, the new shares are treated as the same asset as old shares, or
• on a series or combination of such transactions

the periods over which the shares have been held are joined together in testing whether a substantial shareholding has been held for a continuous period of 12 months. When such transactions occur the gain over the whole period during which the shares have existed will accrue on their eventual disposal. So the whole period over which the gain accumulated is taken into account in testing whether the substantial shareholding requirement is met.

Paragraph 10 Schedule 7AC TCGA 1992 contains the rules for no gain/no loss transactions. Where the company making the disposal of the shares acquired them by way of a no gain/no loss transfer, the period over which it is treated as if it held the shares is extended back through any series of such transfers. Also, the company making the disposal is treated as having been entitled to the rights enjoyed by the holders of the shares over this period.

In certain circumstances the normal no gain/no loss rule in section 171(1) TCGA 1992 is disapplied by section 171(3), see CG45550 onwards. However, for the purposes of joining together periods of ownership to decide whether the substantial shareholding requirement is met this disapplication is over-ridden - see paragraph 10(2) Schedule 7AC TCGA 1992. So periods of ownership before and after a transfer to which section 171(3) applies can be aggregated in determining whether the substantial shareholding requirement is satisfied.

Paragraph 14 Schedule 7AC TCGA 1992 may apply when there has been a share exchange or company reconstruction to which section 135 or 136 TCGA 1992 applies the section 127 TCGA 1992 no disposal or acquisition and same asset treatment, see CG52500 onwards. In order to test whether the substantial shareholding requirement is met when an investing company holds shares issued in an exchange to which section 127 applies you may have to look at more than one holding of shares. If the exchange occurred during the 12 month period you are considering you take into account the shares held before the exchange as well as the shares held afterwards. If by combining

• the period after the exchange when the new shares comprised a substantial shareholding, with
• a period before the exchange when the old shares comprised such a holding

there is a continuous 12 month period throughout which substantial shareholdings were held starting no more than 2 years before the disposal, then the substantial shareholding requirement is met. Note that this treatment is only possible where section 127 applies. If section 127 has been disapplied by paragraph 4 Schedule 7AC TCGA 1992 (see CG53170) periods before and after the exchange cannot be joined together in this way.

For example,

• Company A has two wholly owned subsidiaries, companies B and C.
• Company A holds (say) 20% of the ordinary share capital of company X for 6 months - this is not long enough for the holding to meet the substantial shareholding requirement.
• Company X is then taken over by company Y. Company A receives shares issued by company Y in exchange for its shares in company X, so that section 135 applies the no disposal/same asset treatment of section 127. Company A is treated as if it had acquired its shares in company Y as it acquired its shares in company X some 6 months earlier. Thereafter company A holds (say) 12% of the ordinary share capital of company Y.
• After 3 months company A transfers its company Y shares to company B - section 171(1) applies so this is a no gain/no loss transfer.
• After a further month company B transfers the shares in company Y to company C - again, at no gain/no loss under section 171(1).
• After a further 5 months company C sells the shares in company Y. It would calculate the gain or loss on this disposal by reference to the original cost of the shares in company X when company A acquired them.
• Assume that the entitlement to distributable profits and assets attached to the shares in companies X and Y is the same as the percentage of the ordinary share capital held at all times.

Company C has only held the shares in company Y for 5 months, but meets the substantial shareholding requirement.

• Paragraph 10 Schedule 7AC provides that you look back through the two no gain/no loss transfers. You treat company C as if it held the shares in company Y throughout the 4 months when companies A and B held them. Adding that 4 month period to the 5 months that company C held the Y shares brings the period during which company C is treated as if it held at least 10% of company Y's ordinary share capital up to 9 months.
• Paragraph 14 Schedule 7AC allows company A to test whether its holding of shares in company Y met the substantial shareholding requirement by reference to its holding of shares in company X before the exchange as well as its shares in company Y after the exchange.
• Paragraph 10(6) Schedule 7AC carries this treatment through to companies B and C.
• So company C adds the 6 months during which company A's holding of shares in company X counted as a substantial shareholding to the 9 months it is treated as having a substantial shareholding in company Y. Company C is treated as having held a substantial shareholding for 14 months, and so meets the substantial shareholding requirement of paragraph 7 Schedule 7AC.

In contrast to the way periods are extended when there is no gain/no loss or no disposal treatment, paragraph 11 Schedule 7AC TCGA 1992 provides that the holding period of a substantial shareholding ends when a company is deemed to have sold and reacquired shares. Unlike the no gain/no loss or the no disposal situation, when there is a deemed disposal and reacquisition

• the gain or loss on the deemed disposal may be within the substantial shareholdings legislation and exempt if the necessary conditions are satisfied, and
• the gain or loss on the ultimate real disposal of the shares will be based on the market value at which the shares are deemed to be reacquired.

So the holding period for the purpose of deciding whether the substantial shareholding requirement is met runs from the time of the reacquisition, not the time the shares where first acquired.

Paragraph 15 Schedule 7AC TCGA 1992 gives equivalent treatment to a demerger to which section 192 TCGA 1992 applies section 127 TCGA 1992 (see CG57815) to that paragraph 14 gives on a share exchange or company reconstruction.