Commentary on Sections Overview Overview Section 712: Identification of shares after reorganisations etc.
2722.This section deals with the identification of shares following a reorganisation etc, for example, where there has been a bonus issue of shares or where there has been an issue of shares falling within section 135 or 136 TCGA. It is based on paragraph 8(3) and (4) of Schedule 15B to ICTA and sets out three rules.
2723.The first rule (subsection (2)), is that any “new shares” acquired as a result of the reorganisation etc. are treated as satisfying the conditions for exempt shares set out in section 709(4) and, if relevant, section 709 (6), if the “old shares” satisfied those conditions. Dividends paid in respect of the new shares therefore qualify for the income tax exemption under this Chapter.
2724.The condition in section 709(6) relates to shares acquired on or after 9 March 1999. If the “old shares” were acquired before 9 March 1999 the new shares do not need to satisfy the condition in section 709(6). The source legislation refers only to the new shares being treated as satisfying the annual acquisition condition. See Change 115 in Annex 1.
2725.The second rule (subsection (3)) is that if only a proportion of the “old shares” met the condition about the annual acquisition limit or the commercial reasons test then only the corresponding proportion of the “new shares” are treated as doing so. It follows that the remainder of the new shares are treated as not doing so. So dividends paid in respect of those shares would not qualify for the income tax exemption under this Chapter.
2726.The source legislation is silent as to whether “new shares” in excess of that corresponding proportion (“excess new shares”) get another chance to qualify as exempt shares if any of the current year’s annual acquisition limit remains available.
2727.For example, in the tax year in which the “new shares” are issued (say with a value of £150,000 of which £100,000 qualify under the corresponding proportion rule) further shares are acquired to a value of say £100,000. The issue is whether the £50,000 new shares which did not qualify under the corresponding proportion rule can be treated as falling within the annual acquisition limit because £100,000 of the current year’s annual acquisition limit remains available.
2728.Paragraph 8(4)(a) of Schedule 15B to ICTA ensures that the excess new shares are disregarded in determining whether acquisitions, made during the same tax year as the excess new shares are issued, come within the annual acquisition limit. The position of the excess new shares is dealt with solely under paragraph 8(4)(b) of Schedule 15B to ICTA. That sets out the extent the new shares are to be treated as acquired within the permitted maximum by reference to the status of the shares from which they are derived, that is, the proportionate basis. If they do not qualify under that provision, they do not qualify at all.
2729.It is not thought to be the intention of the legislation that excess new shares should have a second chance of being treated as falling within the permitted maximum. So subsection (3) provides explicitly that the remaining new shares are not treated as meeting the conditions to qualify for the income tax exemption. This is implied but not expressly stated in the source legislation.
2730.The third rule (subsection (4)) provides that the new shares are ignored in determining whether other shares acquired in the same tax year qualify for the income tax exemption.