514 Company reconstructions, amalgamations, etc

Summary

This section contains technical provisions to cater for the situation where, in consequence of company reconstructions or reorganisations, the shares originally allocated to participants are replaced by new shares or securities. Broadly, the section is designed to ensure that the new shares or securities stand in the place of the original shares and are dealt with by the trustees in the same way as the original shares.

Details

(1) “new shares” are shares comprised in a new holding which were issued in respect of, or otherwise represent, shares comprised in the original holding.

“the corresponding shares” are shares in the holding before the reconstruction in respect of which the new shares were issued or which the new shares otherwise represent.

(2) This section applies where there is a transaction in relation to any of a participant’s shares (referred to as “the original holding”) which, for capital gains tax purposes, would result in an new holding being equated with an original holding. The scope of these transactions includes bonus issues, rights issues, alterations of rights attaching to a share class, conversion of securities, including exchanges and company amalgamations, reconstructions and takeovers.

(3)(a) Shares issued as part of a company reconstruction, which trigger a distribution charge in accordance with section 131(2), are not to be treated as standing in the place of the original shares in respect of which they were issued. Since the shares in question are, therefore, chargeable directly to tax in the hands of the participants under Schedule F, they should, accordingly, be passed direct to the participants by the trustees.

[Section 131(2) treats as a distribution an amount paid by a company where that company repays share capital after 27 November, 1975, and after the repayment, issues as fully paid up, other than for full consideration, share capital.]

(3)(b) The existing charge to tax provided for in sections 130(2) and 132(2) are preserved in relation to “redemption moneys” or “capital repayments”. In this instance, as the charge to tax is not on the shares themselves but on the proceeds of redemption or repayment the shares involved should be retained by the trustees and allocated to the participants holding the original shares. These bonus shares, broadly, are subject to the normal provisions of approved profit sharing schemes.

(4) The rules needed to ensure that new shares issued on a reconstruction stand in the place of the original shares are that —

• a company reconstruction is not to be treated as involving a disposal of shares comprised in the original holding (so that there will not be an income tax charge under section 512) at the time of the reconstruction,
• the new shares are to be treated as having been allocated to the participant on the date the corresponding shares were allocated (so that the period for the purpose of calculating the appropriate percentage (under section 511(3)) will run from the original date of allocation,
• the conditions which have to be satisfied in respect of scheme shares (see Part 3 of Schedule 11) are treated as fulfilled in respect of the new shares if they were fulfilled, in respect of the corresponding shares.

(5) When scheme shares are disposed of the participant is generally liable to income tax on a percentage of the locked-in value (the initial market value of the shares less any capital receipts which have been charged to tax under section 513). When there has been a company reconstruction it is necessary to apportion the locked-in value of the old corresponding shares among the new shares. The steps to be taken are —

• ascertain the locked-in value, before the reconstruction, of the old corresponding shares which have the same locked-in value of each other, and
• distribute that locked-in value among any of the old shares which survive into the new holding, and the new shares, pro rata, according to their market value immediately after the reconstruction.

It is also provided that section 512(1)(a) (which is concerned with the determination of locked-in value) is to apply only to capital receipts after the date of the reconstruction. This is to ensure that the locked-in values of the new shares which have been determined by reference to capital receipts received before that date will not be further reduced on account of the same receipts.

Any subsequent income tax charged in respect of the shares in the new holding will be by reference to their locked-in value immediately after the reconstruction, calculated as set out earlier.

(6) When, as part of a company reconstruction, the trustees become entitled to a capital receipt in addition to new shares, the necessary adjustment to the locked-in value of the corresponding shares in respect of the capital receipt must be made before the locked-in value of the new shares is calculated. In other words, because the income tax charge on the capital receipt will reduce the value of the corresponding shares, the locked-in value of the new shares will be determined by that reduced amount.

(7) For the purposes of the provisions relating to company reconstructions “shares” (which by virtue of section 509(1) includes stock and specified securities), in relation to a new holding, includes securities and rights of any description which form part of the new holding for the purposes of section 584 (reorganisation or reduction in share capital).

Relevant Date: Finance Act 2021