House of Commons - Explanatory Note
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This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 29: Share loss relief: identification of shares disposed of out of a mixed holding: clause 148

This change expands and clarifies the rules for identifying the shares disposed of, in cases where an individual disposes of some only of the shares in a mixed holding. As to what constitutes a mixed holding, see Change 27.

Section 576(1) of ICTA sets out a general rule that, where shares are disposed of by an individual out of a mixed holding, the shares disposed of are to be identified on a last in first out (LIFO) basis.

This rule is modified by section 576(1A) and (1B) of ICTA in the case of a mixed holding which includes shares to which EIS income tax relief, EIS deferral relief or BES relief is attributable.

At the time of the introduction of this provision by section 37 of FA 1980 and of its consolidation in 1988 as section 576(1) of ICTA, share pooling applied generally for the purposes of capital gains tax. Under share pooling, shares of the same class acquired by the same person in the same capacity are regarded as indistinguishable parts of a single asset. Thus, the consideration given for the shares in the pool is spread evenly across the shares and there is no need for capital gains tax purposes to identify the specific shares disposed of.

The LIFO identification rule is, therefore, necessary for the purposes of section 574(1) of ICTA to identify whether, on the disposal of some only of the shares out of a pool consisting partly of shares that are not capable of being qualifying shares, the shares disposed of are qualifying shares.

Share pooling continues for capital gains tax purposes in relation to shares acquired before 6 April 1998 (see sections 104 and 109 of TCGA), but from that date sections 105(2) and 106A of TCGA substitute rules for identifying shares disposed of as between shares acquired on different dates falling on or after 6 April 1998 and as between shares acquired on or after that date and shares acquired before that date.

In practice the rule in section 106A(6) of TCGA applies in the majority of cases. This provides that shares disposed of are to be identified with shares acquired at a later time, rather than with shares acquired at an earlier time. Shares acquired before 6 April 1998 remain pooled.

This is a LIFO rule and so, as regards shares acquired on or after 6 April 1998, does not differ from the rule in section 576(1) of ICTA.

Where all the shares have been acquired on or after 6 April 1998 by single acquisitions on different days, the capital gains tax rules in section 106A of TCGA serve, in practice, to identify the shares disposed of without need for recourse to the rules in section 576(1) of ICTA.

Section 105 of TCGA also contains rules in relation to shares acquired on the same day. Those rules are modified by section 105A of TCGA in relation to certain shares acquired on or after 6 April 2002. Section 105A is supplemented by section 105B of TCGA. In general, shares of the same class acquired by an individual on the same day are pooled.

In practice, if some but not all of the shares of the same class acquired on the same day are shares that are not capable of being qualifying shares and if some only of the shares acquired on that day are disposed of, the question whether and to what extent the shares disposed of are qualifying shares is determined for the purposes of section 574 of ICTA on a just and reasonable basis; normally pro rata to the number of shares acquired on that day.

In rewriting the rule in section 576(1) of ICTA, the approach taken in clause 148 is that:

  • so far as the rules in sections 105 to 105B and 106A of TCGA serve conclusively to identify whether and to what extent the shares disposed of out of a mixed holding are qualifying shares, those rules are explicitly applied (see subsections (3)(a)(i) and (4));

  • so far as shares acquired on different days are treated as a single asset for capital gains tax purposes under section 104 of TCGA (a "section 104 holding"), the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the section 104 holding (see subsections (3)(a)(ii) and (5)); and

  • so far as shares acquired on different days are treated as a single asset for capital gains tax purposes under section 109 of TCGA (a "1982 holding"), the LIFO rule in section 576(1) of ICTA is applied separately to the shares in the 1982 holding (see subsections (3)(a)(ii) and (5)).

In a case where the mixed holding includes shares to which EIS income tax relief, EIS deferral relief or BES relief is attributable, subsections (3)(a), (4) and (5) are displaced by subsections (3)(b) and (6). Subject to the change described in Change 30, the rules applied by those subsections are the same as those applied by section 576(1A) and (1B) of ICTA.

So far as the preceding rules do not conclusively determine whether and to what extent the shares disposed of are qualifying shares, for example where some but not all of the shares of the same class acquired on the same day are shares that are not capable of being qualifying shares, subsection (7) states explicitly that the determination is to be made on a just and reasonable basis.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 30: Share loss relief: identification of shares disposed of where shares acquired on the same day include approved-scheme shares: clause 149

This change ensures that the identification rules for the purposes of share loss relief follow the identification rules for the purposes of capital gains tax in cases to which section 105A of TCGA applies.

On a disposal of shares forming part of a mixed holding which includes shares to which EIS income tax relief, EIS deferral relief or BES relief is attributable, section 576(1B)(b) of ICTA applies the rules in section 299(6) to (6D) of that Act to determine whether and if so to what extent the shares disposed of are qualifying shares. These provisions have been rewritten in clause 148(3)(b) and (6) as described in Change 29. Clause 148(6)(b) and (c) apply the rules relating to holdings including shares to which EIS relief is attributable in section 299(6) to (6D) of ICTA and in clause 246 of this Bill which rewrites those subsections of ICTA in relation to shares issued on or after 6 April 2007.

Section 150A of TCGA applies where EIS income tax relief is attributable to any shares disposed of. Subsection (4) provides that:

Any question as to—

(a)     which of any shares acquired by an individual at different times a disposal relates to, being shares to which relief is attributable, or

(b)     whether a disposal relates to shares to which relief is attributable or to other shares,

shall for the purposes of capital gains tax be determined as for the purposes of section 299 of [ICTA]..

Section 299(6A) of ICTA provides that:

Where shares of any class in a company have been acquired by an individual on the same day, any of those shares disposed of by him shall be treated for the purposes of this section as disposed of in the following order, namely—

(a)     first any to which neither relief under this Chapter nor deferral relief is attributable;

(b)     next any to which deferral relief, but not relief under this Chapter, is attributable;

(c)     next any to which relief under this Chapter, but not deferral relief, is attributable; and

(d)     finally any to which both relief under this Chapter and deferral relief are attributable;

and in this subsection and subsection (6C) below "deferral relief" has the same meaning as in Schedule 5B to the 1992 Act.

Section 105A(4)(b) of TCGA modifies section 299 of ICTA for the purposes of section 150A(4) of TCGA where an individual acquires shares of the same class, on the same day and in the same capacity ("relevant shares") and:

  • some of the relevant shares are "approved-scheme shares" (as defined in section 105A(1)(b) of TCGA) and

  • the relevant shares include shares to which EIS income tax relief or deferral relief is attributable.

The modification permits the individual to make an election, the principal effect of which is that the approved-scheme shares falling with any of paragraphs (a) to (d) of section 299(6A) of ICTA are treated for capital gains tax purposes as disposed of after the other relevant shares falling within the same paragraph.

The modification is not made to section 299 of ICTA for all purposes, as it is not necessary for the purpose of determining the amount of relief to be withdrawn or reduced.

By applying the rules in section 299(6) to (6D) of ICTA without applying the modification where appropriate, there may be cases where the shares identified as disposed of for the purposes of share loss relief are not, in whole or in part, the shares identified as disposed of for the purposes of capital gains tax. In that event, share loss relief will not be available in respect of any shares which are not treated as disposed of for capital gains tax purposes, as no allowable loss will have arisen in relation to those shares.

In order to avoid this mismatch and ensure that the identification rules for the purposes of share loss relief follow the identification rules for the purposes of capital gains tax, clause 149(1) applies section 299 of ICTA and clause 246 of this Bill with the modification made by section 105A(4) of TCGA in a case falling within section 105A of that Act.

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected and the amounts involved are likely to be small.

Change 31: Share loss relief: shares to which section 127 of TCGA applies: clause 149

This change makes explicit the time at which, among others, corresponding bonus shares are treated as issued for the purposes of clause 148. It is, in part, consequential on the inclusion of clause 135(4) (see Change 23) which treats corresponding bonus shares as subscribed for by an individual.

The time at which such shares are treated as issued to or acquired by the individual claiming relief needs to be ascertained for a number of purposes. See clause 150(3) and Change 34. The clauses to which clause 150(3) applies relate only to shares to which EIS relief is not attributable.

The time at which corresponding bonus shares are treated as issued to or acquired by the individual 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) to (1B) of ICTA, rewritten in clause 148.

Clause 149(2) has been included for this purpose. A different approach from that in clause 150(3) has been adopted, as clause 148 applies both to shares to which EIS relief is attributable and to those to which it is not.

Clause 149(2) follows the wording in clause 246(6) which applies to shares to which EIS relief is attributable issued on or after 6 April 2007. Clause 246(6) is based on section 299(6D) of ICTA which applies to such shares issued before that date but not before 1 January 1994. Section 299(6D) of ICTA is in the same terms as section 299(4C) of ICTA which applies to shares issued before 1 January 1994 to which BES relief is attributable.

Clause 148(6) applies section 299(4C) or section 299(6D) of ICTA or clause 246(6) of this Bill if the mixed holding includes shares to which BES relief or EIS income tax relief or deferral relief is attributable. Clause 149(2) ensures that the same provision also applies if the mixed holding does not contain any of such shares.

But clauses 149(2) and 246(6) (and the equivalent provisions of ICTA) 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 neither BES relief nor EIS income tax relief nor EIS deferral relief is 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 clause 148 as acquired at the same time as the shares in the existing holding.

But if any such relief is attributable to the shares in the existing holding or to new shares allotted for payment, clause 149(2) does not apply to the allotment. This is because TCGA provides that, if there is such an allotment for payment and any of such reliefs is attributable either to the shares in the existing holding or to the allotted shares, section 127 of that Act does not apply (see sections 150(9) and 150A(7) of and paragraph 7 of Schedule 5B to TCGA).

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 32: Share loss relief: nominees and bare trustees: clause 149

This change makes clear that, if shares of the same class are held as to some directly by the individual and as to the others by a nominee or bare trustee for the individual, all the shares are included in a single holding of the individual for the purposes of clause 148.

An individual who has subscribed for shares may subsequently wish to transfer the shares into the name of a nominee or bare trustee for the individual. On a disposal of the shares on behalf of the individual by the nominee or bare trustee, the allowable loss for capital gains tax purposes and the entitlement to relief under section 574 of ICTA is that of the individual not that of the nominee or bare trustee.

Section 311 of ICTA (rewritten as clause 250) includes provisions equivalent to those in clause 149(3). Section 311 of ICTA applies to shares to which EIS relief is attributable for the purposes of share loss relief, by virtue of section 305A of that Act. This change expressly also applies those provisions to shares to which EIS relief is not attributable.

This change is adverse to some taxpayers and favourable to others in principle. But it is expected to have no practical effect as it is in line with current practice.

Change 33: Share loss relief: time of issue of shares transferred between spouses or civil partners: clause 150

This change inserts an explicit provision determining the time at which shares issued to an individual (A) and transferred to A's spouse or civil partner (B) are treated as issued to B.

Section 574(3)(b) of ICTA, which is rewritten as clause 135(3), treats shares subscribed for by A and transferred to B as having been subscribed for by B. See Changes 21 and 22.

The time at which such shares are treated as issued to B needs to be ascertained for the purposes of determining in relation to shares issued on or after 6 April 1998:

  • the beginning of the period during which the company must carry on its business wholly or mainly in the United Kingdom (section 576(4)(c) of ICTA);

  • the time at which the unquoted status requirement is to be met in accordance with section 293(1A) of ICTA as applied by section 576(4A) of that Act; and

  • the time at which the gross assets requirement is to be met in accordance with section 293(6A) of ICTA as so applied.

Section 576(4)(c) of ICTA provides that the period begins one year before the shares in respect of which the relief is claimed are issued or, if later, the date of incorporation of the company. This links the beginning of the period to the date of issue of the shares to A.

In the other cases, no explicit link is made, but it is the practice, in those cases, also to treat the shares that are treated as subscribed for by B as having been issued to B at the time they were issued to A.

In order to provide an explicit link, clause 150(2) applies for the purpose of determining:

  • the beginning of the period during which the company must carry on its business wholly or mainly in the United Kingdom (clause 134(5)(a));

  • the time at which the gross assets test is to be conducted (clause 142(1)(a) and (2)(a)); and

  • the time at which the unquoted status requirement is to be met (clause 143(1)).

As a consequence of the introduction of clauses 145 and 146, it is necessary to determine the date on which the new shares are to be treated as having been issued for the purposes of clause 146(2)(b). Accordingly, clause 150(2) also applies for that purpose.

These changes are adverse to some taxpayers and favourable to others in principle. But they are expected to have no practical effect as they are in line with current practice.

Change 34: Share loss relief: time of issue of corresponding bonus shares: clause 150

This change inserts an explicit provision determining the time at which corresponding bonus shares are treated as issued. It is consequential on the inclusion of clause 135(4) (see Change 23) which treats corresponding bonus shares as subscribed for by an individual.

The time at which such shares are treated as issued to the individual claiming relief needs to be ascertained for the purposes of determining:

  • the beginning of the period during which the company must carry on its business wholly or mainly in the United Kingdom (clause 134(5)(a));

  • the time at which the gross assets requirement is to be met (clause 142(1)(a) and (2)(a));

  • the time at which the unquoted status requirement is to be met (clause 143(1)); and

  • if clause 145 applies, the time at which the new shares are to be treated as having been issued for the purposes of clause 146(2)(b).

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 35: Share loss relief: time of disposal: clause 151

This change makes explicit the tax year in which the disposal is to be treated as occurring for the purpose of share loss relief.

The availability of share loss relief is dependent upon an allowable loss being incurred for capital gains tax purposes and this can only be incurred on a disposal within the meaning given in TCGA.

The provisions of TCGA which determine in which tax year a disposal occurs, including in particular section 28 of that Act, do not apply to sections 574 to 576 of ICTA. Share loss relief is given in practice for the tax year in which the disposal is made or treated as made for the purposes of capital gains tax in accordance with TCGA.

Clause 151(8) contains explicit provision to this effect.

Although this change in principle affects the timing of relief and could be favourable to some taxpayers and adverse to others, it is entirely in line with current practice and so will have no practical effect.

Change 36: EIS: claim in respect of less than the total number of shares, on which claimant is eligible for EIS relief, in a single issue: clauses 158, 201, 210, 218, 219, 220, 226, 227, 228 and 229

This change provides that, in relation to a single issue of shares, an individual may claim EIS relief in respect of fewer than the total number of shares in respect of which the individual is eligible for relief (restricted claim).

Consequential changes are made to deal with any recovery of relief in cases where an individual makes a restricted claim.

Section 289A of ICTA says:

(1)     Where an individual eligible for relief in respect of any amount subscribed for eligible shares makes a claim, then, subject to the following provisions of this Chapter, the amount of his liability for the year of assessment in which the shares were issued ("the current year") to income tax on his total income shall be the following amount.

(2)     That amount is the amount to which he would be so liable apart from this section less whichever is the smaller of-

    (a)     an amount equal to tax at the lower rate for the current year on the amount or, as the case may be, the aggregate of the amounts subscribed for eligible shares issued in that year in respect of which he is eligible for relief, and

    (b)      the amount which reduces his liability to nil.

Those two subsections are silent on whether an individual, who is eligible for relief on more than one issue of shares, can claim relief in relation to one issue but not the other one (multiple issues). The subsections are also silent on whether, in relation to a single issue of shares, a restricted claim may be made (restricted claims).

Multiple issues

The provisions of section 306 of ICTA (claims) can operate to give different times from which an individual may claim relief in respect of separate issues of shares. From this (and other provisions) it seems clear, and is in line with HMRC practice, that an individual may claim relief in respect of one issue of shares but not another.

The references in clause 158(1) and (2) respectively to:

"the issue" and "and claims EIS relief"

make it clearer that relief can be claimed on one issue of shares but not another.

Restricted claims

There is no indication that other provisions of ICTA contemplate restricted claims.

In fact other provisions, such as section 289B(2)(b) of ICTA (attribution of relief to shares) appear to assume that restricted claims cannot be made. That is because the attribution of relief by section 289B(2)(b) between issues of shares on which relief is claimed is based on:

the amounts subscribed by the individual for each issue.

This attribution under section 289B(2)(b) of ICTA would give arbitrary results if a restricted claim were possible. It would be illogical to attribute relief between issues of shares on the basis of 100% of the claimant's subscriptions for each issue while calculating the relief itself by reference to different percentages of each subscription.

Also, under section 289B(3)(a), where an amount of any reduction of income tax is attributed to an issue of shares, ("the original issue"):

(a) a proportionate part of that amount shall be attributed to each share comprised in the original issue

So if for example there is a subscription for shares of £500,000 in 2006-07 which exceeds the maximum of £400,000 for which relief can be obtained and there is a disposal of £100,000 of this holding, the relief attributed to the shares disposed of will be one fifth of the relief obtained.

Whatever the position in ICTA there are good reasons for allowing restricted claims. There could be cases where an individual might reasonably wish to restrict such a claim (perhaps to ensure that the benefit of personal allowances is secured or to obtain the most favourable tax treatment for a part disposal of shares).

The references in clause 158(1) to:

all or some of the shares included in the issue

permit a restricted claim.

Consequentials of restricted claims

Consequential changes are made to clauses 201(2), (3) and (4), 210(1), 218(2), 219(2), 220(1), 226(2), 227(2), 228(2) and 229(1). Their intention is that recovery of relief operates correctly if a restricted claim has been made.

Thus clause 201(2) refers to the amounts:

claimed by the individual in respect of each issue.

The equivalent reference in section 289B(2) of ICTA is to the amounts:

subscribed by the individual for each issue.

In addition clause 201(3), rewriting section 289B(3)(a), states:

If under this section an amount of any reduction of income tax is attributed to an issue of shares.. a proportionate part of that amount is attributed to each share in respect of which the claim is made.

An investor issued with shares of £500,000 in 2007-08, which exceeds the maximum of £400,000 on which relief can be obtained, can make a claim for relief on £400,000 worth of the shares. If there is a disposal of £100,000 of this holding, none of the relief obtained for this subscription would be attributed to these shares, following the identification rules in clause 246(3).

This change is in taxpayers' favour in principle and may benefit some in practice. But the numbers affected are likely to be small.

Change 37: EIS: limit is on the amount of relief in a year: clause 158

This change provides that the limit on EIS relief for a tax year is a limit on the amount by which the individual's income tax liability may be reduced. It is not a limit on the amount of subscriptions in respect of which the individual is eligible for relief, and which may be included in a claim, for the tax year.

Section 290(2) of ICTA says that for a tax year an individual shall:

..not be eligible for relief.. in respect of any amount.. exceeding £400,000..

From those words it might be thought that an individual may not make a claim in respect of shares, whether relating to an issue by one company or several companies, for an amount in excess of £400,000.

Paragraphs 25430 and 26020 of HMRC's Venture Capital Schemes Manual show that this is not the practice. A claim may be made in respect of amounts over £400,000 but any income tax reduction is capped at £400,000 multiplied by the lower tax rate.

Other provisions that proceed on the basis that section 290(2) of ICTA caps the relief (rather than the amounts on which a claim may be made) also support this practice. Those provisions include section 299(4) of ICTA (although that provision also caters for cases where a claim has been made in respect of an amount below £400,000) and section 150A(3) of TCGA.

Clause 158(2)(b) places a cap on the amount of entitlement to EIS relief rather than on the amount of subscriptions in respect of which claims may be made.

 
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Prepared: 8 December 2006