VCM48450 - VC loss relief: special rules for share reorganisations: new consideration given for new shares: example

ICTA88/S575 (2)(b)

The following example shows how you calculate the VC loss relief due when a qualifying trading company makes a rights issue to a shareholder who has non-qualifying shares.

  • On 1 January 1995 a taxpayer buys 4,000 shares in J Ltd for £11,000. Although J Ltd is a qualifying trading company VC loss relief cannot be due should an allowable loss arise on a subsequent disposal of those shares as the taxpayer did not acquire them by subscription.
  • On 1 April 1998 J Ltd makes a 2 for 1 rights issue at £2 per share to which the taxpayer subscribes, so acquiring a further 8,000 shares for £16,000.
  • On 31 March 2002 the taxpayer sells 6,000 of his 12,000 shares at arm’s length for £11,000 less costs of disposal £400.

The shares fall to be dealt with in a TCGA92/S104 holding. The computations are as follows:

Number of shares held

Actual cost

Indexed cost

January 1995: section 104 holding created4,000£11,000£11,000
April 1998: indexation (factor 0.114)£1,254
4,000£11,000£12,254
April 1998: rights issue 2 for 1 at £2 each8,000£16,000£16,000
12,000£27,000£28,254
March 2002: part disposal of 6,000 shares(6,000)(£13,500)(£14,127)
6,000£13,500£14,127

The disposal of 6,000 shares in March 2002 results in an allowable loss, as follows:

Disposal proceeds£11,000
Costs of disposal(£400)
£10,600
less indexed cost£14,127
or actual cost£13,500[#](£13,500)
Allowable loss£2,900


[#] For individuals, indexation has been frozen at April 1998 - see CG17207. For disposals on or after 30 November 1993 indexation allowance cannot create or enhance an allowable loss.

Now go through the four steps described in VCM48400.

Step 1

Compute the allowable loss in the usual way. This is £2,900.

Step 2

Identify the qualifying and the non-qualifying shares held before the disposal. The rights issue shares are treated as subscribed shares. So there are 8,000 qualifying shares and 4,000 non- qualifying shares. The qualifying shares included in the part disposal of 6,000 shares are identified pro rata using the formula:

6,000 x8,000= 4,000
12,000


Step 3

Calculate the part of the allowable loss of £2,900 arising on the qualifying shares using the formula:

£2,900 x4,000= £1,933
6,000


Step 4

Compare the figure in Step 3 of £1,933 with the new consideration actually given for the 4,000 qualifying shares sold - 4,000 shares at £2 per share = £8,000. VC loss relief is allowed on the lower figure - £1,933.

The balance of the allowable loss £967 (£2,900 less £1,933) is available for the taxpayer to set against CG.