CG64165 - Entrepreneurs’ Relief: share exchanges etc involving QCBs before 6th April 2008 – deferred gains coming back into charge on or after 6th April 2008 - transitional rules

FA2008 Schedule 3 Paragraph 7

FA2008/Sch3/Para7 provides transitional rules to allow claims for Entrepreneurs’ Relief where:-

• an exchange of shares or securities for qualifying corporate bonds (QCBs) (the “relevant transaction” as in section 116 TCGA) took place before 6 April 2008, but
• a gain deferred in respect of that transaction becomes chargeable on or after 6th April 2008 as a result of a disposal, including by way of redemption, of the QCBs (the “relevant disposal”). The rules under which gains are deferred may be found at CG53820+.

TCGA92/S169R (see CG64160) applies where the exchange of shares or securities for QCBs takes place on or after 6 April 2008. However where that exchange takes place before 6 April 2008, but a deferred gain relating to the exchange comes into charge on or after that date, TCGA92/S169R can have no effect because, at the time of the exchange, Entrepreneurs’ Relief did not exist and hence could not be claimed.

Where the gain deferred is in respect of a “relevant transaction” which took place before 6th April 2008 but the “relevant disposal” that brings the deferred gain into charge took place on or after 6th April 2008 Entrepreneurs’ Relief may be claimed in respect of that “relevant disposal” if a disposal of the ‘old asset’ (the shares or securities exchanged for the QCBs) would have qualified for that relief on the assumption that Entrepreneurs’ Relief had been available at the time of the relevant transaction - FA08/Sch3 /Para7(2).

Relief will be available only to the person who made the exchange. If all or part of the ‘new asset’ (the QCBs) has been transferred to a spouse or civil partner and as a result all or part of the deferred gain subsequently arises to that person, Entrepreneurs’ Relief will not be available in respect of that part of the deferred gain. If however the ‘new asset’ (or any part) is returned to the investor before the ‘first relevant disposal’, the gain can qualify for Entrepreneurs’ Relief.

Entrepreneurs’ Relief under these transitional rules must be claimed on the first occasion on or after 6 April 2008 when a deferred gain comes into charge (“the first relevant disposal”). Relief (if due) will be given in respect of all deferred gains relating to that same exchange (or “relevant transaction”) that have not come into charge before that date – FA08/Sch3/Para7(3), to the extent that the ‘new asset’ (the QCBs) is held at that time by the person who made the exchange.

If there is a claim to Entrepreneurs’ Relief under these transitional rules, the gains in respect of which relief is claimed will form part of the claimant’s maximum amount of £1 million of gains qualifying for relief.

The time limit for claiming Entrepreneurs’ Relief (see CG63970) in respect of the “first relevant disposal” commences at the date that this event occurs.

Calculation

Example

Calculation

Entrepreneurs’ Relief is available in respect of so much of the gain deferred as a result of the “relevant transaction” as has not come into charge before 6 April 2008. So, subject to the lifetime limit of £1 million of gains qualifying for relief, that amount is reduced by 4/9ths and the net amount becomes the amount to be brought into charge in respect of disposals of the “new asset” (the QCBs) on or after 6 April 2008 – FA08/Sch3/Para7 (4) & (5).

Where the whole of the new asset (the QCBs) are not disposed of at the time of the “first relevant disposal” then on each subsequent “relevant disposal” by the individual after 6 April 2008, a proportion of the total amount (net of Entrepreneur’s Relief) comes into charge. That proportion is equivalent to the proportion of the QCBs held at the time of the “first relevant disposal” that are disposed of in the subsequent “relevant disposal” – FA08/Sch3/Para7 (6) & (7).

So if the “first relevant disposal” is of one-third of the QCBs held at that time, one-third of the net gain comes into charge on that occasion. A further proportion of the net gain will come into charge on later “relevant disposals” by the individual, pro rata to the proportion of the QCBs disposed of in each disposal.

Example

In October 2006 W exchanged his shares in his “personal company” partly for cash and partly for QCB’s. The original cost of the shares was £900,000 and he received total consideration of £1,000,000, consisting of £250,000 cash and £750,000 QCB’s. W then disposes of his QCB’s in three tranches: -

• One third in 2007/08,
• One third in 2008/09, and
• One third in 2009/10.

Because the QCBs themselves are not chargeable to CGT the ‘same asset’ treatment of TCGA92/S127 is disapplied. A capital gain is calculated upon the ‘disposal’ of the shares (the ‘old asset).

That gain latent in the ‘old asset’ is frozen and attached to the ‘new asset’ (the new holding of QCBs) but not immediately charged to tax. When the ‘new asset’ or any part of it is disposed of the ‘frozen’ gain, or a proportion of it, is deemed to accrue and hence become taxable - see CG53820+.

The total gain will be £100,000 (£1m less £900,000). That gain should be calculated in relation to the market value of the shares at the time of the exchange. For the purpose of this example however it is accepted that the consideration of £1,000,000 is the market value of the old asset. Any indexation which may be due for assets owned pre March 1998 is calculated at this time – see CG17319 – but taper relief is not included within this calculation.

• £25,000 will become chargeable straight away (2006/7) as this relates to the cash element (£100,000 x £250,000/£1m) and may the be reduced by any taper relief due (see CG17895+).

The remaining £75,000 of the gain relates to the QCB’s and will be deferred until they are disposed of.

• The first tranche of QCB’s is then redeemed in 2007/8 so the relevant proportion of the gain which comes back into charge at that time = £75,000 x 1/3 = £25,000 less any taper relief due (see CG17911).
• The second tranche of QCB’s is redeemed in 2008/9 so a charge will arise for that year. The charge will be:

• The third tranche of QCB’s is redeemed in 2009/10. The same calculation applies as for the second tranche so the relevant proportion of the gain coming back into charge for 2009/10 is again: -