ANNEX 1:: MINOR CHANGES IN THE LAW MADE BY THE BILL This change is in taxpayers’ favour in principle. But it is expected to have no practical effect as it is in line with current practice.
Change 25: Share loss relief: removal of mandatory requirement for pre-clearance of share exchange: section 145, Schedule 1 (section 576J of ICTA) and Schedule 2Part 6 (relief after an exchange of shares for shares in another company)
This change removes the requirement in section 304A(1)(f) of ICTA, as applied to sections 573 and 574 of that Act by section 576(4A) of that Act, that a clearance must have been obtained before section 304A of that Act can apply.
Section 304A(1)(f) of ICTA provides that:
“before the issue of the new shares the Board have, on the application of the new company or the old company, notified that company that the Board are satisfied that the exchange of shares-(i)will be effected for bona fide commercial reasons, and(ii)will not form part of any such scheme or arrangements as are mentioned in section 137(1) of the 1992 Act.”
Section 145(1)(e) of this Act and the new section 576J(1)(e) of ICTA introduced by Schedule 1 to this Act replace section 304A(1)(f) of ICTA with a requirement that:
“by virtue of section 127 of TCGA 1992 as applied by section 135(3) of that Act, the exchange of shares is not to be treated as involving a disposal of the old shares or an acquisition of the new shares.”
These provisions also omit section 304A(8) of ICTA which applies section 138(2) of TCGA for the purposes of section 304A(1)(f) of ICTA.
The mandatory requirement contained in section 304A(1)(f) of ICTA for clearance to be obtained in advance of the issue of the new shares is necessary in the context of a provision which permits EIS income tax relief attributable to shares in a company to continue to be attributed to shares in a new holding company issued under an exchange of shares which meets the other requirements of that subsection.
Where EIS income tax relief is not attributable to the old shares, it is likely that in practice advance clearance will have been sought, and given, under section 138 of TCGA in advance of the exchange of shares. There may, however, be a minority of cases where such a clearance was not sought but, if it had been sought, would have been given. One case in which such a clearance might not have been sought is if no person held more than 5% of the shares in the old company (see section 137(2) of TCGA).
Paragraph 8(1) of Schedule 5B to TCGA which deals with EIS re-investment relief is in similar terms to section 304A(1) of ICTA with the exception of paragraph (f). That paragraph does not require there to be advance clearance but requires that the anti‑avoidance provisions of section 137 of TCGA do not apply so as to prevent the no disposal treatment under section 127 of that Act applying to the old shares.
Section 145(1)(e) of this Act and the new section 576J(1)(e) of ICTA are in similar terms to paragraph 8(1) of Schedule 5B to TCGA, with the result that, in the minority of cases where an advance clearance under section 138 of TCGA has not been sought, share loss relief under Chapter 6 of Part 4 or relief under section 573 of ICTA is not denied solely because of the failure to have obtained such a clearance.