Income Tax Bill

House of Commons

Session 2006 - 07
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Other Bills before Parliament

Income Tax Bill

Income Tax Bill
Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
66

132
Entitlement to claim
(1)
An individual who is eligible for share loss relief may make a claim for the loss
to be deducted in calculating the individual’s net income—
(a)
for the year of the loss,
(b)
for the previous tax year, or
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(c)
for both tax years.

(See Step 2 of the calculation in section 23.)
(2)
If the claim is made in relation to both tax years, the claim must specify the year
for which a deduction is to be made first.
(3)
Otherwise the claim must specify either the year of the loss or the previous tax
10
year.
(4)
The claim must be made on or before the first anniversary of the normal self-
assessment filing date for the year of the loss.
133
How relief works
(1)
This subsection explains how the deductions are to be made.
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The amount of the loss to be deducted at any step is limited in accordance with
section 25(4) and (5).


Step 1

Deduct the loss in calculating the individual’s net income for the specified tax
20
year.


Step 2

This step applies only if the claim is made in relation to both tax years.

Deduct the part of the loss not deducted at Step 1 in calculating the individual’s
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net income for the other tax year.
(2)
Subsection (1) is subject to sections 136(5) and 147 (which set limits on the
amounts of share loss relief that may be obtained in particular cases).
(3)
If an individual—
(a)
makes a claim for share loss relief against income (“the first claim”) in
30
relation to the year of the loss, and
(b)
makes a separate claim for share loss relief against income in respect of
a loss made in the following tax year in relation to the same tax year as
the first claim,

priority is to be given to making deductions under the first claim.
35
(4)
Any share loss relief claimed in respect of any income has priority over any
relief claimed in respect of that income under section 64 (deduction of losses
from general income) or 72 (early trade losses relief).
(5)
A claim for share loss relief does not affect any claim for a deduction under
TCGA 1992 for so much of the allowable loss as is not deducted under
40
subsection (1).

Income Tax Bill
Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
67

Shares to which EIS relief is not attributable
134
Qualifying trading companies
(1)
In relation to shares to which EIS relief is not attributable (see section 131(2)(b)),
a qualifying trading company is a company which meets each of conditions A
to D.
5
(2)
Condition A is that the company either—
(a)
meets each of the following requirements on the date of the disposal—
(i)
the trading requirement (see section 137),
(ii)
the control and independence requirement (see section 139),
(iii)
the qualifying subsidiaries requirement (see section 140), and
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(iv)
the property managing subsidiaries requirement (see section
141), or
(b)
has ceased to meet any of those requirements at a time which is not
more than 3 years before that date and has not since that time been an
excluded company, an investment company or a trading company.
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(3)
Condition B is that the company either—
(a)
has met each of the requirements mentioned in condition A for a
continuous period of 6 years ending on that date or at that time, or
(b)
has met each of those requirements for a shorter continuous period
ending on that date or at that time and has not before the beginning of
20
that period been an excluded company, an investment company or a
trading company.
(4)
Condition C is that the company—
(a)
met the gross assets requirement (see section 142) both immediately
before and immediately after the issue of the shares in respect of which
25
the share loss relief is claimed, and
(b)
met the unquoted status requirement (see section 143) at the relevant
time within the meaning of that section.
(5)
Condition D is that the company has carried on its business wholly or mainly
in the United Kingdom throughout the period—
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(a)
beginning with the incorporation of the company or, if later, 12 months
before the shares in question were issued, and
(b)
ending with the date of the disposal.
135
Subscriptions for shares
(1)
This section has effect in relation to shares to which EIS relief is not attributable.
35
(2)
An individual subscribes for shares in a company if they are issued to the
individual by the company in consideration of money or money’s worth.
(3)
If—
(a)
an individual (“A”) subscribed for, or is treated under subsection (4) or
this subsection as having subscribed for, any shares,
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(b)
A transferred the shares to another individual (“B”) during their lives,
and
(c)
A was B’s spouse or civil partner at the time of the transfer,

B is treated as having subscribed for the shares.

Income Tax Bill
Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
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(4)
If—
(a)
an individual has subscribed for, or is treated under subsection (3) or
this subsection as having subscribed for, any shares, and
(b)
any corresponding bonus shares are subsequently issued to the
individual,
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the individual is treated as having subscribed for the bonus shares.
136
Disposals of new shares
(1)
This section has effect in relation to shares to which EIS relief is not attributable.
(2)
If—
(a)
an individual disposes of shares (“the new shares”), and
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(b)
the new shares are, by virtue of section 127 of TCGA 1992
(reorganisation etc treated as not involving disposal), identified with
other shares (“the old shares”) previously held by the individual,

the individual is not eligible for share loss relief on the disposal of the new
shares unless one of conditions A and B is met.
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This is subject to section 145(3).
(3)
Condition A is that the individual would have been eligible for share loss relief
on a disposal of the old shares—
(a)
if the individual had incurred an allowable loss in disposing of them by
way of a bargain made at arm’s length on the occasion of the disposal
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that would have occurred but for section 127 of TCGA 1992, and
(b)
where applicable, if this Chapter had then been in force.
(4)
Condition B is that the individual gave for the new shares consideration in
money or money’s worth other than consideration of the kind mentioned in
paragraph (a) or (b) of section 128(2) of TCGA 1992 (“new consideration”).
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(5)
If the individual relies on condition B, the amount of share loss relief on the
disposal of the new shares must not exceed the amount or value of the new
consideration taken into account as a deduction in calculating the amount of
the loss incurred on the disposal.
Qualifying trading companies: the requirements
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137
The trading requirement
(1)
The trading requirement is that—
(a)
the company, ignoring any incidental purposes, exists wholly for the
purpose of carrying on one or more qualifying trades, or
(b)
the company is a parent company and the business of the group does
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not consist wholly or as to a substantial part in the carrying on of non-
qualifying activities.
(2)
If the company intends that one or more other companies should become its
qualifying subsidiaries with a view to their carrying on one or more qualifying
trades—
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(a)
the company is treated as a parent company for the purposes of
subsection (1)(b), and

Income Tax Bill
Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
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(b)
the reference in subsection (1)(b) to the group includes the company
and any existing or future company that will be its qualifying
subsidiary after the intention in question is carried into effect.

This subsection does not apply at any time after the abandonment of that
intention.
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(3)
For the purpose of subsection (1)(b) the business of the group means what
would be the business of the group if the activities of the group companies
taken together were regarded as one business.
(4)
For the purpose of determining the business of a group, activities are ignored
so far as they are activities carried on by a mainly trading subsidiary otherwise
10
than for its main purpose.
(5)
For the purposes of determining the business of a group, activities of a group
company are ignored so far as they consist in—
(a)
the holding of shares in or securities of a qualifying subsidiary of the
parent company,
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(b)
the making of loans to another group company,
(c)
the holding and managing of property used by a group company for
the purpose of one or more qualifying trades carried on by a group
company, or
(d)
the holding and managing of property used by a group company for
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the purpose of research and development from which it is intended—
(i)
that a qualifying trade to be carried on by a group company will
be derived, or
(ii)
that a qualifying trade carried on or to be carried on by a group
company will benefit.
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(6)
Any reference in subsection (5)(d)(i) or (ii) to a group company includes a
reference to any existing or future company which will be a group company at
any future time.
(7)
In this section—
“excluded activities” has the meaning given by section 192 read with
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sections 193 to 199,
“group” means a parent company and its qualifying subsidiaries,
“group company”, in relation to a group, means the parent company or
any of its qualifying subsidiaries,
“incidental purposes” means purposes having no significant effect (other
35
than in relation to incidental matters) on the extent of the activities of
the company in question,
“mainly trading subsidiary” means a subsidiary which, apart from
incidental purposes, exists wholly for the purpose of carrying on one or
more qualifying trades, and any reference to the main purpose of such
40
a subsidiary is to be read accordingly,
“non-qualifying activities” means—
(a)
excluded activities, and
(b)
activities (other than research and development) carried on
otherwise than in the course of a trade,
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“parent company” means a company that has one or more qualifying
subsidiaries,
“qualifying subsidiary” is to be read in accordance with section 191,
“qualifying trade” has the meaning given by section 189, and

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Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
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“research and development” has the meaning given by section 940.
(8)
In sections 189(1)(b) and 194(4)(c) (as applied by subsection (7) for the purposes
of the definitions of “excluded activities” and “qualifying trade”) “period B”
means the continuous period that is relevant for the purposes of section 134(3).
138
Ceasing to meet trading requirement because of administration or
5
receivership
(1)
A company is not regarded as ceasing to meet the trading requirement merely
because of anything done in consequence of the company or any of its
subsidiaries being in administration or receivership.

This has effect subject to subsections (2) and (3).
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(2)
Subsection (1) applies only if—
(a)
the entry into administration or receivership, and
(b)
everything done as a result of the company concerned being in
administration or receivership,

is for genuine commercial reasons, and is not part of a scheme or arrangement
15
the main purpose or one of the main purposes of which is the avoidance of tax.
(3)
A company ceases to meet the trading requirement if before the time that is
relevant for the purposes of section 134(2)—
(a)
a resolution is passed, or an order is made, for the winding up of the
company or any of its subsidiaries (or, in the case of a winding up
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otherwise than under the Insolvency Act 1986 or the Insolvency
(Northern Ireland) Order 1989, any other act is done for the like
purpose), or
(b)
the company or any of its subsidiaries is dissolved without winding up.

This is subject to subsection (4).
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(4)
Subsection (3) does not apply if —
(a)
the winding up is for genuine commercial reasons, and is not part of a
scheme or arrangement the main purpose or one of the main purposes
of which is the avoidance of tax, and
(b)
the company continues, during the winding up, to be a trading
30
company.
(5)
References in this section to a company being “in administration” or “in
receivership” are to be read in accordance with section 252.
139
The control and independence requirement
(1)
The control element of the requirement is that—
35
(a)
the company must not control (whether on its own or together with any
person connected with it) any company which is not a qualifying
subsidiary of the company, and
(b)
no arrangements must be in existence by virtue of which the company
could fail to meet paragraph (a) (whether at a time during the
40
continuous period that is relevant for the purposes of section 134(3) or
otherwise).
(2)
The independence element of the requirement is that—
(a)
the company must not—
(i)
be a 51% subsidiary of another company, or
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Income Tax Bill
Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
71

(ii)
be under the control of another company (or of another
company and any other person connected with that other
company), without being a 51% subsidiary of that other
company, and
(b)
no arrangements must be in existence by virtue of which the company
5
could fail to meet paragraph (a) (whether at a time during the
continuous period that is relevant for the purposes of section 134(3) or
otherwise).
(3)
This section is subject to section 145(3).
(4)
In this section—
10
“arrangements” includes any scheme, agreement or understanding,
whether or not legally enforceable,
“control”, in subsection (1)(a), is to be read in accordance with section
416(2) to (6) of ICTA,
“qualifying subsidiary” is to be read in accordance with section 191.
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140
The qualifying subsidiaries requirement
(1)
The qualifying subsidiaries requirement is that any subsidiary that the
company has must be a qualifying subsidiary of the company.
(2)
In this section “qualifying subsidiary” is to be read in accordance with section
191.
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141
The property managing subsidiaries requirement
(1)
The property managing subsidiaries requirement is that any property
managing subsidiary that the company has must be a qualifying 90%
subsidiary of the company.
(2)
In this section—
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“property managing subsidiary” has the meaning given by section 188(2),
“qualifying 90% subsidiary” has the meaning given by section 190.
142
The gross assets requirement
(1)
The gross assets requirement in the case of a single company is that the value
of the company’s gross assets—
30
(a)
must not exceed £7 million immediately before the shares in respect of
which the share loss relief is claimed are issued, and
(b)
must not exceed £8 million immediately afterwards.
(2)
The gross assets requirement in the case of a parent company is that the value
of the group assets—
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(a)
must not exceed £7 million immediately before the shares in respect of
which the share loss relief is claimed are issued, and
(b)
must not exceed £8 million immediately afterwards.
(3)
The value of the group assets means the sum of the values of the gross assets
of each of the members of the group, ignoring any that consist in rights against,
40
or shares in or securities of, another member of the group.
(4)
In this section—

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Part 4 — Loss relief
Chapter 6 — Losses on disposal of shares
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“group” means a parent company and its qualifying subsidiaries,
“parent company” means a company that has one or more qualifying
subsidiaries,
“qualifying subsidiary” is to be read in accordance with section 191, and
“single company” means a company that does not have one or more
5
qualifying subsidiaries.
143
The unquoted status requirement
(1)
The unquoted status requirement is that, at the time (“the relevant time”) at
which the shares in respect of which the share loss relief is claimed are issued—
(a)
the company must be an unquoted company,
10
(b)
there must be no arrangements in existence for the company to cease to
be an unquoted company, and
(c)
there must be no arrangements in existence for the company to become
a subsidiary of another company (“the new company”) by virtue of an
exchange of shares, or shares and securities, if—
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(i)
section 145 applies in relation to the exchange, and
(ii)
arrangements have been made with a view to the new company
ceasing to be an unquoted company.
(2)
The arrangements referred to in subsection (1)(b) and (c)(ii) do not include
arrangements in consequence of which any shares, stocks, debentures or other
20
securities of the company or the new company are at any subsequent time—
(a)
listed on a stock exchange that is a recognised stock exchange by virtue
of an order made under section 939, or
(b)
listed on an exchange, or dealt in by any means, designated by an order
made for the purposes of section 184(3)(b) or (c),
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if the order was made after the relevant time.
(3)
In this section—
“arrangements” includes any scheme, agreement or understanding,
whether or not legally enforceable, and
“unquoted company” has the meaning given by section 184(2).
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144
Power to amend requirements by Treasury order
The Treasury may by order make such amendments of sections 137 to 143 as
they consider appropriate.
Qualifying trading companies: supplementary
145
Relief after an exchange of shares for shares in another company
35
(1)
This section and section 146 apply in relation to shares to which EIS relief is not
attributable if—
(a)
a company (“the new company”) in which the only issued shares are
subscriber shares acquires all the shares (“old shares”) in another
company (“the old company”),
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(b)
the consideration for the old shares consists wholly of the issue of
shares (“new shares”) in the new company,