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 created | 4,000 | £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 each | 8,000 | £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 x | 8,000 | = 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 x | 4,000 | = £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.
