UK and International Tax news

HMRC Issues Guidance On Share Exchanges Involving Non UK Incorporated Close Companies

Wednesday 30th August 2023

HMRC has updated its Capital Gains Manual with guidance on share exchanges involving non UK incorporated close companies.

As previously reported in UK Tax News, the Finance (No 2) Act 2023 brought into effect one key measure announced by the Chancellor in his Spring Budget 2023 (and the Autumn Statement 2022) which relates to a change in the tax treatment of share exchanges involving non UK incorporated close companies.

The new rule applies where, on or after 17 November 2022, shares and securities in a UK close company (broadly, a company controlled by five or fewer shareholders) are exchanged for those in a non-UK company, that would be close if situated in the UK. The new rule treats the shareholding in the non UK company to be located in the UK.

This means that dividends paid by the non-UK company will be treated as UK dividends and any disposal of the securities will be treated as a disposal of a UK asset, so the remittance basis will not be available.

HMRC’s latest guidance confirms that the rule applies where both the UK and non-UK companies are close companies and, on exchange, the share issue is to an individual who is a participator in both companies. The rule only applies to the participator who, together with their associates, holds a 5% or greater material interest in each company.

A material interest is a holding of, or being able to control, more than 5% of the ordinary share capital of a company, or possessing or being entitled to acquire a right to more than 5% of the assets of the company, in a winding up or otherwise.

The treatment also applies where the securities are transferred to a spouse or civil partner on a no gain/no loss basis, to further securities of the non-UK company issued to an affected individual, to securities of another company issued in circumstances where the relevant conditions of s.138A TCGA92 apply in regard to that company, and to replacement securities acquired under a repo or stock lending arrangement.

An individual may elect to disapply the effect of the rule with the result that the share reorganisation rules will not apply and the securities in the UK company will be treated as having been disposed of at the time of the exchange or scheme of reconstruction. The time limit for making the election is the 31 January following the tax year in which the securities of the non-UK company are issued.

If you would like more information on the above changes, please contact Keith Rushen on 0207 486 2378.

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