Annex 1: Minor changes in the law Change 17: Share loss relief: shares to which section 127 of TCGA applies: section 77
This change makes explicit the time at which, among others, corresponding bonus shares are treated as issued for the purposes of section 76. It is, in part, consequential on the inclusion of section 73(3) (see Change 12) which treats corresponding bonus shares as subscribed for by the company.
This change is the same as that made in section 149(2) of ITA for the purposes of relief against income tax. See Change 31 in Annex 1 to the explanatory notes on ITA.
The time at which such shares are treated as issued to or acquired by the company claiming relief needs to be ascertained for a number of purposes. See section 89 and Change 20.
The time at which corresponding bonus shares are treated as issued to or acquired by the company claiming relief also needs to be ascertained for the purpose of determining which shares are disposed of in accordance with the identification rules in section 576(1) and (1C) of ICTA, rewritten in section 76.
Section 77(1) has been included for this purpose. A different approach from that in section 89(2) has been adopted. Section 76 applies where the holding includes shares to which investment relief within the meaning given by Schedule 15 to FA 2000 (corporate venturing scheme)is attributable. In cases where it so applies, section 76 applies the rules in paragraph 93 of Schedule 15 to FA 2000. For consistency, section 77(1) follows the wording in paragraph 93(7) of that Schedule.
Section 77(1) and paragraph 93(7) of Schedule 15 to FA 2000 do not apply only to issues of corresponding bonus shares. They also apply to allotments of shares for payment, for example by way of rights, which meet the requirements of section 126(2)(a) of TCGA and to which section 127 of that Act applies.
This ensures that, if investment relief is not attributable to the shares in the existing holding or the new shares, new shares issued by way of rights within section 126(2)(a) of TCGA are treated for the purposes of section 76 as acquired at the same time as the shares in the existing holding.
But if investment relief is attributable to the shares in the existing holding or to new shares allotted for payment, section 77(1) does not apply to the allotment. This is because paragraph 81 of Schedule 15 to FA 2000 provides that, if there is such an allotment for payment and investment relief is attributable either to the shares in the existing holding or to the allotted shares, section 127 of that Act does not apply.
In addition to making the necessary provision consequent on the explicit treatment of corresponding bonus shares as being subscribed for, this change has the effect, for the purposes of section 76, of treating rights issue shares as issued earlier than the date on which they are actually issued, except as described in the preceding paragraph.
If the rights issue shares form part of a mixed holding and some only of the shares in the mixed holding are disposed of, the effect of this change is to prevent the taxpayer from claiming a greater amount of relief or from obtaining relief earlier than would be the case under generally accepted practice (see paragraphs 47400 and 48350 of HMRC’s Venture Capital Schemes Manual), by advancing an argument that the rights issue shares are to be identified as being among the shares disposed of by reference to the actual date of their issue.
This change is adverse to some taxpayers in principle. But it is expected to have no practical effect as it is in line with generally accepted practice.