ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small. Change 26: Share loss relief: restrictions on the amount of relief available: section 147
This change refines and extends the provision in section 576(1) of ICTA which restricts the amount of share loss relief available in a case where qualifying shares forming part of a holding are disposed of.
Section 576(1) of ICTA provides that, if an individual disposes of qualifying shares forming part of a holding, the amount of relief must not exceed the sums which would be allowed as deductions in computing the allowable loss if the shares had not been part of the holding.
For capital gains tax purposes, where shares are pooled in a section 104 holding (see section 104 of TCGA) or a 1982 holding (see section 109 of TCGA), the total consideration given for all the shares in the pool is averaged across the shares. This means that, when there is a part disposal of shares out of the holding, a proportion of this consideration is deducted in computing the chargeable gain pro-rata to the number of shares disposed of over the total number of shares in the pool. This may result in an allowable loss on the disposal of such shares being greater than it would have been if the shares had not been pooled.
This provision is designed to limit the share loss relief available in such cases to no more than what would have been the amount allowable as a deduction in calculating the loss if the shares had not been pooled. Ignoring incidental costs of acquisition and disposal, this will equate in most cases to the amount subscribed for the shares. It is a general rule, but is of special relevance to the case where some of the shares in the pool are not qualifying shares.
To cater for the abolition of pooling in relation to shares issued on or after 6 April 1998 and the changes in section 148 described in Change 29, section 147 refines the circumstances in which the provision applies. The circumstances are:
	where the qualifying shares disposed of form part of a section 104 holding or a 1982 holding at the time of the disposal or formed part of such a holding at any earlier time (subsections (1) and (2));
	where both qualifying shares and shares that are not capable of being qualifying shares are acquired on the same day and are treated by virtue of section 105(1)(a) of TCGA for the purposes of capital gains tax as acquired by a single transaction (subsections (3) and (4)); and
	where the qualifying shares in a company are treated by virtue of section 127 of TCGA for the purposes of capital gains tax as the same asset as other shares in the same company that are not capable of being qualifying shares or as debentures of the same company (subsections (5) and (6)).
The section has the following effects:
	Subsections (1) and (2) rewrite the provision in section 576(1) of ICTA with two changes.
	The first change is that subsection (2) only applies to shares which are pooled in a section 104 holding or a 1982 holding. It requires the allowable deductions for the qualifying shares to be re-calculated as if the qualifying shares did not form part of the section 104 holding or the 1982 holding. But it does not affect the calculation of the allowable deductions in any other way. For example, if there has been an issue of corresponding bonus shares in respect of original qualifying shares, the re-calculated allowable deductions will be apportioned in the usual way across the original shares and the corresponding bonus shares.
	The second change is that subsection (2) expressly applies if an individual disposes of all the shares in the section 104 holding or the 1982 holding and at some time those shares and other shares which have been disposed of earlier formed part of the same holding (see subsection (1)(b)(ii)). This deals with the effect on the pool allowable cost where the other shares were acquired at a different price from that of the shares now being disposed of. It is a clarification of the scope of the provision in section 576(1) of ICTA.
	Subsections (3) to (6) are new. They are limited to mixed holdings (see the commentary on section 148 and Change 27) and deal with the residual situations where the cost of shares which are not within a section 104 holding or a 1982 holding are still averaged. The general provision in subsection (1) is not required for shares which do not form part of a pool. It is only in the case of shares in such a holding that acquisitions and disposals of other shares which at any time formed part of the holding will affect the allowable cost of the qualifying shares disposed of.
	Subsections (3) and (4) deal with the circumstances where the cost of qualifying shares and shares that are not capable of being qualifying shares acquired on the same day are subject to averaging.
	Subsections (5) and (6) ensure that the limit is calculated separately in relation to the qualifying shares in the case of a reorganisation, such as a rights issue, involving qualifying shares and shares that are not capable of being qualifying shares or debentures. In those circumstances, the allowable deductions by reference to which the limit is to be calculated in accordance with this subsection are likely to differ from the cost of acquisition of the qualifying shares calculated in accordance with section 129 of TCGA.
Subsection (8) explains what is meant by “shares that are not capable of being qualifying shares” for the purposes not only of this section but also section 148. See Change 27 for a detailed explanation of why a mixed holding has been defined in terms of a holding which includes such shares. Subsection (9) extends this meaning for the purposes only of subsection (5) to cover re-organisations involving the issue of shares of a different class.