Extract from an article by Adrian Rudd (of PricewaterhouseCoopers, Tax Adviser's representative on Technical Committee) on technical issues which have recently been considered by the personal taxes and capital taxes sub-committees. (Published in the August 2000 issue of Tax Adviser.)Taper relief – qualifying companies
Where shares are disposed of by an individual or by trustees, the shares are a business asset for the purposes of taper relief if at that time the relevant company is a ‘qualifying company’. This means that the company must be a trading company or the holding company of a trading group. For this purpose a trading group means a ‘group of companies’ the activities of which, taken together, do not to any substantial extent include activities carried on otherwise than in the course of, or for the purposes of, a trade.
At a recent meeting with the Institute the Inland Revenue indicated at that they consider the ‘not substantial’ test as representing roughly a 20 per cent threshold.
Taper relief – earn-out rights
The Institute wrote to the Inland Revenue regarding taper relief on earn-out rights. If an election under TCGA 1992, s.138A(5) is made, s.138A(3)(a) provides that the earn-out right is a security within the definition in s.132. Moreover, for taper relief purposes, references to shares are to include any securities of the same company – TCGA 1992, Sch. A1, para 22.
The Institute’s interpretation is that if an earn-out is received in exchange for shares or debentures, and an election under TCGA 1992, s.138A(5) is made, it follows that the earn-out right can be treated as a security, and therefore as shares, for taper relief purposes. Because of the basis on which s.138A works, for taper relief purposes those deemed shares are deemed to be issued in exchange for the original shares or debentures, and have the same acquisition date as the original shares or debentures.
Whether the deemed shares have business asset status for taper relief purposes at any particular time, however, will depend on whether the relevant tests in the new definition in the Finance Bill are met at that time.
The Inland Revenue replied as follows:
I can confirm that, for the purposes of TCGA 1992, the effect of an election under s.138A is to treat the earn-out right as a security of the new company acquiring the original shares (s.138A(3)(b)). Paragraph 22, Schedule A1 makes clear that ‘shares’, in relation to a company, includes any securities of that company.
The earn-out right will therefore form part of the ‘new holding’ which, under s.127, is treated as the same asset as the original shares for which it was exchanged. The beginning of the qualifying holding period for taper relief purposes will therefore be calculated with reference to the date of acquisition of the original shares.
The end of the qualifying holding period will depend on the type of securities issued in satisfaction of the earn-out right which was the subject of the election. If the exchange is for qualifying corporate bonds then the qualifying holding period will end on the date of exchange and not the date of disposal of the QCB. Where the exchange is for securities other than qualifying corporate bonds then the qualifying holding period will end with the disposal of these securities.
On the assumption that the relevant provisions are enacted, I can agree that whether the securities, deemed or otherwise, are business assets at any point in time from 6 April 2000 will depend on whether the relevant tests in FB 2000 are met at that point in time.
My comments above ignore any possible modification to the qualifying holding period as a result of the operation of paragraphs 10 to 12 Sch. A1 TCGA 1992.
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