CGT Entrepreneurs’ Relief and share for share exchange

By Technical Team on 27 May 2010

Query raised with HMRC - whether the 12 month ownership requirement for Entrepreneurs’ Relief includes the holding period of the original shares where there has been a share for share exchange.

Following some queries from members on this issue, which is not explicitly answered by the legislation, we asked HMRC to clarify how they would usually treat such transactions.

Question raised with HMRC CGT Policy.

All references are to TCGA 1992.

Facts are: Shareholder (S) owned >5% of the OSC and votes of a company (OldCo). A new holding company (NewCo) was put on the top in July 2009 via a section 135 share-for-share exchange (with HMRC clearance). S owns >5% of the OSC and votes in NewCo. All other requirements such as being a director or employee, trading company etc are satisfied.

Question: Does the 12 month ownership period for Entrepreneur's Relief (ER) include a period when shares were held in a previous company where there was a share-for-share exchange?

Answer from HMRC Capital Taxes Charity, Assets & Residence, Capital Gains Technical Group

‘While I note you say that this relates to an actual client query and of course I am not in possession of all the details relating to that individual, I can say that 'in principle', for the purposes of whether Entrepreneurs' relief may be available, then assuming there is no election under section 169Q and on the understanding that at all times both the 'original' and 'new' holdings are in shares in companies which would qualify as the individual's personal trading companies by whom they were employed, then you may look through the exchange (to which section 127 TCGA 92 applies) to ascertain whether the one year holding period of section 169I(6) has been complied with.

Please note that HMRC are happy for this clarification to be published with the caveat that it is subject to the detail of individual cases. HMRC will consider including this point in the next update of the Entrepreneurs’ Relief guidance.