Draft legislation was published last month to amend the value shifting rules for inclusion in Finance Act 2011 as part of a number of simplification measures for Capital Gains Tax.
The existing regime, which provides for a general measure with specific exclusions for certain types of transactions, is to be replaced by a new targeted anti avoidance rule.
The new rule will apply where there is a disposal of shares or securities by a company, arrangements have been entered whereby the value of those share or securities is materially reduced, and the main purpose or one of the main purposes of those arrangements is to obtain a tax advantage. In these circumstances any gain or loss on disposal of the shares or securities will be computed as if the consideration for the sale was increased by such an amount as is “just and reasonable” having regard to the value shift.
Where the disposal of shares qualifies for the substantial shareholdings exemption the value shifting rules will have no effect. However, there are a number of circumstances where disposals might not fall within the substantial shareholding exemption and care will be needed to ensure that the new rules do not create an unexpected tax charge.
The depreciatory transaction rules, which limit the amount of an allowable capital loss on a disposal where value has been stripped out of a company, are also being amended such that any depreciatory transactions that occur more than 6 years before the disposal can be ignored.
The rewritten provisions are to apply for disposals of shares and securities after Royal Assent of Finance Act 2011 (probably July 2011).
Although the new rules are billed as a simplification, the reality is that they are likely to be of much wider application, and the introduction of a sole or main benefit test will lead to more uncertainty.
One potential area for difficulty is where transactions have already been entered into to reduce the value of a company prior to disposal where the SSE might no longer apply, for example a disposal as part of the liquidation of a company. Although there is a specific exemption in the case of a value shift attributable to an exempt distribution, exempt distribution for these purposes is extremely narrowly drawn, such that, for example, a dividend of profits created via a capital reduction is unlikely to fall within the exemption.
Clients who are in the process of reorganising groups need to review any potential liquidation disposals in the light of the new rules and where necessary aim to ensure that any disposals occur before the new rules become effective.