GIM5250 - Taxation of the investment return: investment gains: paper for paper exchange of assets: section 473 ICTA 1988

In some cases, however, the presumption of realisation on an exchange discussed at GIM5240 is displaced by ICTA88/S473, which covers certain exchanges etc. of

• shares,
• securities within the meaning of TCGA92/S132 which are not loan relationships,
• rights in a unit trust,
• membership interests in a company which are not shares, and
• options within TCGA92/S147

that are held as circulating capital by, among others, an insurance company whose profits are computed as trade profits. ICTA88/S473 does not apply where the asset was held in such a way that mark to market applied to it for tax purposes and the period of account ended after 31 July 2001 (ICTA88/S473 (2A)).

Where the section applies the transaction is treated as not involving any gain or loss for trade profit purposes at the time of the exchange, etc. Instead the new assets are treated as acquired at the same time as the original shares or securities, and as having the same cost.

The transactions within ICTA88/S473 are those where the new assets would amount to a new holding falling to be treated as the same asset as the original shares or securities, under TCGA92/S126 to TCGA92/S136; or where the new assets comprise gilts received as compensation stock on the nationalisation of a company, within TCGA92/S134.

ICTA88/S473 will therefore apply where there is

• a reorganisation or reduction of the share capital of a company in which existing shareholders receive new holdings in respect of and in proportion to their existing holdings - TCGA92/S126 (see CG 51700 onwards),
• a conversion of securities into shares or other securities - TCGA92/S132 (see CG55000 onwards),
• an exchange of shares or securities on a company takeover, within TCGA1992/S135 (see CG52521 onwards),
• a company reconstruction or amalgamation, within TCGA92/S136 (see CG52700 onwards).

Note however that these provisions will not apply where (and to the extent that) either the original shares or securities, or the new holdings, comprise qualifying corporate bonds which includes all loan relationships (see GIM5090).

Under TCGA92/S138A a vendor who on a share exchange receives a right to unascertainable deferred consideration (an “earn-out”) which can only be satisfied by an issue of shares or debentures, may claim that this right should itself be treated as a security within TCGA92/S132 (see CG58000 onwards). This same treatment may then be applied, in these cases, for the purposes of ICTA88/S473.