Q&As

Does the existence of subscriber shares prevent capital gains reconstruction relief from being available on a demerger?

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Published on LexisPSL on 02/09/2019

The following Tax Q&A provides comprehensive and up to date legal information covering:

  • Does the existence of subscriber shares prevent capital gains reconstruction relief from being available on a demerger?

Most demergers (liquidation demergers, capital reduction demergers and indirect statutory demergers) include a step under which the shareholders of the target company receive shares in one or more newly incorporated companies in respect of their original shares. In order to prevent this from triggering a disposal for capital gains purposes, and so potentially a charge to capital gains tax (or corporation tax on chargeable gains), the shareholders would rely on section 136 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992).

TCGA 1992, s 136 applies where there is a scheme of reconstruction under which the new company issues shares or debentures to the shareholders of the target company ‘in respect of and in proportion to (or as nearly as may be in proportion to)’ their original shareholdings. The definition of a reconstruction in TCGA 1992, Sch 5AA also requires the entitlement of any shareholder to receive new shares to be the same as that of any other shareholder holding shares of the same class.

Following the issue of the new shares, the proportions of shares in the target and the new company held by each shareholder may not be identical. This could be because some shareholders had fractional entitlements to new shares, which would have to be rounded. The statutory words ‘or as nearly as may be in proportion to’ should apply in these

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