GREIT05045 - Capital gains: company reconstructions (section 135 TCGA)

Section 135 TCGA 1992 may apply when a holder of shares or debentures in one company exchanges them for shares or debentures issued by another. When section 135 does apply, the new shares or debentures are treated as the same asset as the original shares or debentures. In other words, there is no disposal for capital gains purposes and any gain or loss latent in the original assets is ‘rolled over’ into the new assets. There are no special rules governing the operation of section 135 in the context of companies within Part 4 of FA 2006 (Real Estate Investment Trusts).

For detailed guidance on section 135 TCGA 1992, see CG52521+.

Example

This example illustrates the operation of section 135 TCGA 1992 where a UK-REIT is involved.

Company T is a property investment company which is not within Part 4 of FA 2006. The holders of shares in T exchange them for newly-issued shares in unconnected company G. G is a member of a Group REIT. Assume the conditions necessary for section 135 to apply are met (CG52523).

The shares in G which are acquired by the former shareholders of T are treated as having the same date of acquisition and CG base cost as their T shares. The CG base cost of the T shares in G’s hands is equal to their market value at the time of the exchange. This is the normal effect of section 135 TCGA 1992. T becomes a member of the G group because of the share exchange. Paragraph 10, Schedule 17 FA 2006 applies section 111 to T at this point:

• The property rental business of T (pre-entry) is treated as ceasing;
• The property rental assets held by T (pre-entry) are treated as being sold by T (pre- entry) and immediately re-acquired by T (tax-exempt) for consideration equal to their market value;
• This deemed sale and re-acquisition does not give rise to any chargeable gain (or allowable loss); and
• An entry charge will apply to T on entry to the Group REIT (section 112 FA 2006) (see GREIT11205).