CG64160 - Entrepreneurs’ Relief: share exchanges etc involving QCBs

TCGA92/S169R

This section applies where there is an exchange of shares or securities for qualifying corporate bonds (QCBs). Gains on QCBs are not chargeable to CGT, and there are special rules (in section 116 of the TCGA) for exchanges of this type – see CG53820+. Under these rules TCGA92/S116 (5) disapplies the effect of TCGA92/S127 to TCGA92/S130 so no election under TCGA92/S169Q can be made in these circumstances because you cannot elect to disapply a section which would not have applied anyway.

TCGA92/S116 (10) (a) requires a calculation is made of the chargeable gain that would have arisen if the exchange (the “relevant transaction”) had involved the disposal of the shares or securities (the “old asset”) at their market value at that time. When making that computation Entrepreneurs’ Relief is deducted (if claimed and due). No further computation of the Entrepreneurs’ Relief is necessary when the QCBs (the “new assets”) are redeemed or disposed of and the accrued, but deferred, gain is released. If only some of the QCBs are redeemed or disposed of, a proportionate part of the deferred gain comes into charge at that time.

The time limit in TCGA92/S169M (3) for making a claim for Entrepreneurs’ Relief in these circumstances will run from the date the exchange (the “relevant transaction”) is made.

TCGA92/S169R provides rules so that in appropriate cases Entrepreneurs’ Relief can be claimed in calculating the gain that would have arisen on a disposal of the “old asset” at the time of the exchange for QCBs.

The rule provides for Entrepreneurs’ Relief to have effect as though the “relevant transaction” were a “disposal of business assets” consisting of the “old asset” – TCGA92/S169R (2). A claim for Entrepreneurs’ Relief can be made in respect of the gain arising on that deemed “disposal of business assets” provided the conditions for that disposal to be a material disposal of business assets are met.

The amount of relief is calculated by treating the amount calculated under TCGA92/S116 (10) (a) as the amount under TCGA92/S169169N (1) in respect of which the 4/9ths deduction under is applied – see CG64125.

Example

A exchanges her shares in the trading company Y Ltd for qualifying corporate bonds (QCBs) in 2010. For some years she has been an employee of Y Ltd, owning 10% of the ordinary shares, which entitle her to exercise 10% of the votes in the company.

She therefore meets the conditions for claiming Entrepreneurs’ Relief in respect of her shares in Y Ltd. The normal rules for share exchanges apply so there is no immediate charge to CGT in 2010 when she exchanges the shares, but the gain that would arise on a disposal of those shares for full market value at the date of the exchange is calculated. That calculation results in a gain of £63,000.

A’s gain of £63,000 will become chargeable to CGT when the QCBs are redeemed or she disposes of them in any other way. Assuming A claims Entrepreneurs’ Relief in respect of the £63,000 gain it will be reduced by 4/9ths to £35,000 and that will be the amount that becomes chargeable when she disposes of the QCBs.