Question raised with HMRC CGT Policy - Entrepreneurs' Relief and share for share exchange

6 Jul 2017

RCB 30/09 reversed previous HMRC guidance issued on 8 January 2003 concerning the base cost of shares acquired prior to 10 April 2003. Revenue & Customs Brief 30/09

This article summarises the background to the two HMRC Briefs and sets out some comments on:

(i) amending affected returns which either the taxpayer can amend or are under enquiry;

(ii) legitimate expectation; and

(iii) unused losses.


In January 2003, HMRC issued guidance, as a consequence of the Mansworth v Jelley case, relating to the disposal of shares acquired through unapproved share option schemes. The guidance advised that HMRC considered the shares‚ CGT acquisition cost for employees to be the market value of the shares on the date the option was exercised, plus any amount charged to income tax on the exercise (and that the disposal proceeds for companies and employment benefit trusts were the market value of the shares on the date that the option was exercised).

Although the law was subsequently amended for shares acquired on or after 10 April 2003, there were many taxpayers who were able (or would be able) to realise CGT losses on pre-10 April 2003 share acquisitions.

RCB 30/09

In RCB 30/09, HMRC advised that, as a consequence of receiving further legal advice, when computing any gain or loss on a disposal of shares acquired prior to 10 April 2003 by exercise of unapproved share options, or in other circumstances where the exercise was liable to income tax, no deduction is due for any amount that was chargeable to income tax on exercising the option. Thus, in effect, HMRC overturned their previous guidance.

RCB 30/09 did not, however, explain why HMRC thought their previous interpretation was incorrect. It also stated that taxpayers should amend previously submitted Self Assessment returns (where they are in time to do so), despite the return having been correctly submitted at the time of submission.

RCB 60/09

HMRC‚ s revised interpretation

Subsequently, and in response to issues raised by the CIOT and other professional bodies, HMRC published Q&As as RCB 60/09.

Although HMRC did not explain why they reached their previous interpretation, they did include the technical argument for their current view of the law; HMRC regard both the consideration actually given for the shares and the amount counting as income that is treated as forming part of the consideration given for the acquisition of the shares as having been replaced by the market value of the shares on exercise.

SA returns

HMRC expect returns submitted post-12 May 2009 to reflect their revised view, and it should be noted that if a different view of the legislation is taken, a disclosure should be made (in the white space of the return) that the taxpayer is not following HMRC‚ s (current) view.

Pre-12 May 2009 SA returns

Capital losses claimed in a Self Assessment are usually final once the enquiry window has passed. Thus, no changes to returns that have become final are required and the losses remain as claimed.

However, HMRC expect losses claimed in Self Assessment returns which are under enquiry, or where the time limit for amendment has not expired, to be computed on the basis of HMRC‚ s current interpretation.

Although, technically, no action is required to amend a return that was made in accordance with prevailing guidance, the Brief anticipates that taxpayers will amend a return if they are in time to do so to ensure that the return is in accordance with the law.

In this regard, and as regards penalties, the Brief notes (see Q&A 11) that HMRC would not regard a pre-12 May 2009 return made in accordance with the previous generally prevailing practice to, of itself, mean that the return had been made negligently. Consequently, it should follow that it would not be negligent to leave a pre-12 May 2009 return unamended, but HMRC have not given this specific confirmation, and there may therefore be a risk of penalties.

Legitimate expectation

Some tax advisers have queried whether the taxpayer has a ‚ legitimate expectation‚ that a capital loss will arise. This aspect was commented on by Dave Hartnett in an open letter to the Editor of Tax Journal of 12 October 2009, where he said: ‚ There may ... be instances where 'legitimate expectation' exists because the taxpayer can show that they acted in reliance upon the old guidance and suffered detriment. In these circumstances HMRC will be bound by its previous guidance.‚

Unused Losses - Summary

Where a pre-1996‚ 97 loss was calculated under the previous practice but remains unused, HMRC do not consider the loss as still available for carry forward, as the quantum of the loss is not ‚ final‚ , and the loss should therefore be recomputed in line with HMRC‚ s revised guidance.

Where a post-Self Assessment loss has been claimed in an SA return and the enquiry period is closed, the quantum of the loss is ‚ final‚ , and any unused losses remain available for carry forward.

Where a post-Self Assessment loss has been claimed in a return and an enquiry is open, or the return can still be amended, HMRC expect that the loss will be recomputed in line with their revised guidance.