Annex 1: Minor changes in the law Change 13: Share loss relief: restrictions on the amount of share loss relief: section 75
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.
This change is the same as that made in section 147 of ITA for the purposes of relief against income tax. See Change 26 in Annex 1 to the explanatory notes on ITA.
Section 576(1) of ICTA provides that, if a company 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 the purposes of corporation tax on chargeable gains, 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 equates 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.
In connection with the changes in section 76 described in Change 16 in Annex 1, section 75 refines the circumstances in which the provision applies as follows:
	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 or disposed of on the same day and are treated by virtue of section 105(1)(a) of TCGA for the purposes of corporation tax on chargeable gains as acquired or disposed of by a single transaction (subsections (3) and (4)); and
	where the qualifying shares in a company are treated for the purposes of corporation tax on chargeable gains by virtue of section 127 of TCGA 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) 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 are apportioned in the usual way across the original shares and the corresponding bonus shares.
	The second change is that subsection (2) expressly applies if the company 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 allowable cost of the shares in the pool 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 76 and Change 14) and deal with the residual situations where the cost of shares which are not within a section 104 holding or a 1982 holding is also subject to averaging.
	Subsections (3) and (4) deal with the circumstances where the cost of qualifying shares and shares which 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 which 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 76. See Change 14 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.
The effect of this change is mainly clarificatory. In particular the reference in section 75(1)(b)(ii) to the shares having formed part of such a holding that is a section 104 holding or a 1982 holding at an earlier time prevents the taxpayer claiming an amount of relief greater than the actual cost of the qualifying shares disposed of by advancing an argument that the restriction on the amount of share loss relief does not apply on the disposal of the whole of a holding.
This change is adverse to some taxpayers in principle and in practice. But the numbers affected and the amounts involved are likely to be small.