'Substantial Relief For Substantial Disposals - The New Proposals'

The current position:

At present, where a UK company sells an investment in another company and realises a profit, that profit is liable for tax as a capital gain at a rate of 30%. No relief is available if the profit achieved is re-invested. However, in July 2001 HM Treasury and the Inland Revenue issued a joint consultation document detailing revised proposals for a new tax relief for companies disposing of substantial shareholdings- Large Business Taxation: The Government's strategy and corporate tax reforms- a consultation document (available at www.hm-treasury.gov.uk or www.inlandrevenue.gov.uk). The government intends any such relief only to apply to shares and not to any other securities. Legislation implementing the new relief is expected to be introduced in the Finance Bill 2002.

A "substantial shareholding":

The proposals envisage that a substantial shareholding would be defined as a beneficial entitlement to at least 20% of the investee company's ordinary share capital, distributable profits and distributable assets (as amplified by the rules in Schedule 18 of the Income and Corporation Taxes Act 1988).

Where the qualifying shareholder company is a member of a trading group, it may be possible to take into account other group members' beneficial interests in the qualifying investee company when determining whether the shareholding is a substantial shareholding. Aggregation of members' interests would be possible at any time when the shares could be transferred between them on a no gain/ no loss basis under the Taxation of Chargeable Gains Act 1992.

The new proposals:

Whilst the government has already considered introducing deferral relief for companies that dispose of a substantial shareholding and reinvest the proceeds in a replacement shareholding, the new consultation document contains an alternative proposal- exempting gains and losses arising from disposals of substantial shareholdings altogether.

Deferral relief v Exemption relief:

The fundamental difference between the proposed exemption relief and deferral relief is the method by which relief is given. An exemption relief would apply automatically and would make any gains achieved tax free, although losses would be unallowable. A company could only take advantage of deferral relief on the other hand where it reinvested the disposal proceeds in a replacement shareholding. The tax charge arising on gains would be delayed and losses would remain allowable.

The...