VCM48150 - VC loss relief: special rules for share reorganisations: issue of shares not treated as reorganisation of share capital

ICTA88/S575 (2)

In many cases the conversion of a loan to shares is not a share reorganisation because the shares:

• may not be issued to people because they were shareholders in the company, or
• may not be issued to the shareholders in the company in the same proportions as their previous holdings of shares in the company.

If the share issue does not amount to a share reorganisation, TCGA92/S251 (3) will apply to establish the allowable cost of the shares. This will be their market value at the time of issue, see CG53510 onwards. That value should normally be agreed by Shares Valuation, see CG59540 onwards.

Example

• Mrs H has lent £60,000 to X Ltd. Mrs H is not a shareholder in X Ltd.
• The company is unable to repay the loan, but offers to make an issue of 60,000 £1 ordinary shares to Mrs H in return for the cancellation of the debt. Mrs H agrees.
• The shares are issued and subsequently Mrs H sells the shares, to an unconnected buyer, for £45,000.

As the shares were not issued to Mrs H in proportion to an existing holding of shares she had in X Ltd, the transaction does not amount to a share reorganisation. Mrs H will acquire the shares in X Ltd at their market value on the date of issue, TCGA92/S251(3). You should normally ask Shares Valuation to agree the value of the shares when they were issued as this (not necessarily £60,000) will be the amount deductible in calculating Mrs H’s allowable loss.

If Mrs H had sold the shares immediately after they were issued it may be possible to argue that there is unlikely to have been any change in their value overnight. Therefore, there is no loss on their disposal. But if you approach a case along these lines you must make it clear that you are not actually seeking to agree the value of the shares, since that is something only Shares Valuation can do.