Tucked away in the detail of the Treasury papers containing the Autumn Statement 2022 was a little publicised announcement, entitled "Preventing Capital Gains Tax Avoidance". This sets out the government's intention to legislate for shares or securities in a non-UK company, which are acquired in exchange for securities in a UK close company to be deemed to be located in the UK (presumably for capital gains tax purposes). This is on condition that an individual has a material interest in both companies and the exchange takes place on or after 17 November 2022. Enacting legislation is expected to be included in the Spring Finance Bill 2023.
It is currently unclear how a "material interest" in the companies will be defined.
Many share-for-share exchanges typically take place with the benefit of "section 135 relief" from Capital Gains Tax. This ensures that no dry tax charge arises on the exchange where certain conditions are met, with the new shares "inheriting" the base cost of the original shares and no chargeable disposal of the original shares being recognised at the time of exchange. Share-for-share relief is available provided the company issuing the new shares holds or acquires through the exchange more than 25% of the ordinary share capital (or more than 50% of the voting power) in the company whose shares are being exchanged. Importantly, it also requires that the exchange is effected for bona fide commercial reasons and does not form part of a scheme or arrangements of which the main purpose, or one of the main purposes, is avoidance of liability to capital gains tax or corporation tax. This is unless the shareholder in question holds 5% or less of the shares in the company issuing the exchange shares.
The introduction of a new deeming rule which changes the situs of the "new" shareholding does not currently appear to be subject to a motive defence. It would be interesting to see the extent to which commercial arrangements for no tax avoidance purpose would or could be affected by the new anti-avoidance rule being proposed.