What Losses are Releivable?
- Capital Gains Tax (CGT) loss relief is available for loans to traders, if certain conditions are satisfied (TCGA 1992 s 253).
- A capital loss may also be available to claim when an asset has become of negligible value (TCGA 1992 s 24).
- If the asset in question is shares, that capital loss can often be turned into an income tax loss and offset against taxable income upon the making of a claim, again if the relevant conditions are satisfied (ITA 2007 s 132).
Conversion to shares
However, if a cash debt is converted into shares, the value of the shares is potentially restricted to the market value of the debt at the time of conversion (TCGA 1992 s 251(3)). So if, for example, the debt is irrecoverable because the company is insolvent, the value of the shares is likely to be negligible when the debt is converted into shares. This means that a negligible value claim may not be possible in respect of the shares.
Fletcher v HMRC [2008] SpC 711
In this case a loan to a company was capitalised by issuing of ‘B’ ordinary shares, with rights that were arguably worthless. The company failed, and a negligible value claim was made. The point at issue was the base cost of those shares. HMRC argued that there was no loss in respect of the ‘B’ shares, on the basis that they had no value when the loan was capitalised, by virtue of TCGA 1992 s 251(3).
Share issue was a ‘reorganisation’
The Special Commissioner allowed the taxpayer’s appeal.
They held that if a loan is converted into shares, and the shares were issued as part of a reorganisation of the company’s share capital (within TCGA 1992 s 126), the transaction would not be treated as an acquisition, so that TCGA 1992 s 251(3) could not apply.
The Commissioner also held that an increase in share capital could be a reorganisation even if it did not come within the precise wording of TCGA 1992 s 126(2), provided that the existing shareholders acquired the new shares because they were existing shareholders and in proportion to their existing beneficial holdings.
The potential effect of a debt conversion into shares being treated as a reorganisation for CGT purposes is that there is no disposal of the original shares and no acquisition of the additional shares. All the shares are treated as a single shareholding. The base cost of those shares is generally the consideration paid originally and also under the rights issue, provided that the capitalisation is an arm’s length bargain (TCGA 1992 s 128(2)). It represents a timely tax planning opportunity in the current economic climate.
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