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

By Technical Team on 25 May 2010

All references are to TCGA 1992.

Facts are: Shareholder (S) owned >5% (OSC and votes) of a company (OldCo). A new holding company (NewCo) was put on the top in July 2009 via a s135 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? Common sense says it should but this is not explicit in the legislation or in the HMRC manual. The client is proposing to sell the company within 12 months of the share-for-share-exchange and is asking if he needs to delay the sale by a few weeks. So anything less than certainty is going to leave him very exposed!

Analysis: We could not find anything explicit in the legislation on the point but our interpretation was as follows (all references are to TCGA 1992):

  • As a result of s135(3), s127 should apply to the share-for-share exchange. The original shares and the new shares are therefore treated as the same asset "acquired as the original shares were acquired" so there is no disposal at that stage.
  • For the purposes of Entrepreneurs' Relief (ER), s127 seems to apply unless an election is made under s169Q (s169Q(5) specifically states that s169Q also applies to share-for-share exchanges under s135).
  • S169I(6) sets out the condition for a qualifying company and, on a strict reading, NewCo hasn't been a qualifying company for 12 months and there is nothing set out anywhere within the share-for-share or ER provisions that treats it as such.
  • Is it reasonable to conclude that the ER ownership period for the new shares began when the original shares were acquired? HMRC Manual CG64155 also seems to support this (again without being explicit on the point). The purpose of s169Q seems to be to allow individuals to disapply s127 should the new shareholding no longer satisfy the criteria so that ER can be claimed at the time of the share-for-share exchange. Examples given for a failure to satisfy the ER criteria include the company no longer being a personal company or the shareholder no longer being an employee. One might infer that the omission of the ownership period as an example means that it is not considered a possible reason for no longer qualifying.

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

"Thank you for your email of 24th May which has been passed onto me by Annie Bush.

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.

I trust this clarifies the position."