Paper for paper transactions and ‘lost’ deal costs

The issue

It is fairly common for a capital gains tax liability to be deferred under section 135 TCGA 1992 when shares are exchanged for shares or certain kinds of loan note in a transaction.


In 2018, Colin sold his company to Large Company Ltd for £500,000 cash and £500,000 worth of non-qualifying corporate bond loan notes (‘non-QCBs’) in Large Company Ltd. The base cost of the shares in his company was negligible. Therefore, Colin assessed himself to tax on a capital gain of £500,000 (less deal costs) and £500,000 of gain was deferred, to be crystallised when the loan notes were redeemed.

In these circumstances, any costs of disposal should have been apportioned on a just and equitable basis to the proceeds that counted as a disposal for tax purposes (i.e. the cash proceeds). Therefore, if Colin’s deal costs amounted to £40,000, then it would be appropriate for him to deduct £20,000 of costs in the above computation, to leave a gain of £480,000. The question then arises about what happens to the other £20,000 of deal costs. This is where something called ‘extra statutory concession D52’ kicks in to allow the costs as a cost of acquisition of the non-QCBs in Large Company Ltd. This means that when the non-QCBs are redeemed, they will only trigger a capital gain of £480,000, rather than £500,000.

It is easy for these costs to be missed, especially when there is a long period of time between a paper for paper deal and the subsequent sale or redemption of the paper that was received.

Forbes Dawson view

Where ‘rollover’ shares or loan notes are disposed of, any previously disallowed costs borne by the shareholder or loan note holder should be identified, as these may be significant. Also, since the lifetime BADR limit was reduced to £1m in 2020, it is likely that these costs would relieve gains at 20%, rather than 10%, and so they could be valuable. The question should at least be asked…..




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