Taxation of Chargeable Gains Act 1992, section 116

Reorganisations, conversions and reconstructions

Part IV Shares, securities, options etc.

(1)This section shall have effect in any case where a transaction occurs of such a description that, apart from the provisions of this section—

(a)sections 127 to 130 would apply by virtue of any provision of Chapter II of this Part; and

(b)either the original shares would consist of or include a qualifying corporate bond and the new holding would not, or the original shares would not and the new holding would consist of or include such a bond;

and in paragraph (b) above “the original shares” and “the new holding” have the same meaning as they have for the purposes of sections 127 to 130.

(2) M12 In this section [F606 references to a transaction include references to any conversion of securities (whether or not effected by a transaction) within the meaning of section 132 and F606] “relevant transaction” means a reorganisation, conversion of securities or other transaction such as is mentioned in subsection (1) above, and, in addition to its application where the transaction takes place after the coming into force of this section, subsection (10) below applies where the relevant transaction took place before the coming into force of this section so far as may be necessary to enable any gain or loss deferred under paragraph 10 of Schedule 13 to the Finance Act 1984 to be taken into account on a subsequent disposal.

(3) Where the qualifying corporate bond referred to in subsection (1)(b) above would constitute the original shares for the purposes of sections 127 to 130, it is in this section referred to as “the old asset” and the shares or securities which would constitute the new holding for those purposes are referred to as “the new asset”.

(4) Where the qualifying corporate bond referred to in subsection (1)(b) above would constitute the new holding for the purposes of sections 127 to 130, it is in this section referred to as “the new asset” and the shares or securities which would constitute the original shares for those purposes are referred to as “the old asset”.

[F607 (4A)In determining for the purposes of subsections (1) to (4) above, as they apply for the purposes of corporation tax—

(a)whether sections 127 to 130 would apply in any case, and

(b)what, in a case where they would apply, would constitute the original shares and the new holding,

it shall be assumed that every asset representing a loan relationship of a company is a security within the meaning of section 132.F607]

(5)So far as the relevant transaction relates to the old asset and the new asset, sections 127 to 130 shall not apply in relation to it.

(6)In accordance with subsection (5) above, the new asset shall not be treated as having been acquired on any date other than the date of the relevant transaction or, subject to subsections (7) and (8) below, for any consideration other than the market value of the old asset as determined immediately before that transaction.

(7)If, on the relevant transaction, the person concerned receives, or becomes entitled to receive, any sum of money which, in addition to the new asset, is by way of consideration for the old asset, that sum shall be deducted from the consideration referred to in subsection (6) above.

(8)If, on the relevant transaction, the person concerned gives any sum of money which, in addition to the old asset, is by way of consideration for the new asset, that sum shall be added to the consideration referred to in subsection (6) above.

F608[F609 (8A)Where subsection (6) above applies for the purposes of corporation tax in a case where the old asset consists of a qualifying corporate bond, [F610 Part 5 of CTA 2009F610] (loan relationships) shall have effect[F611 , subject to subsection (8B) below,F611] so as to require such debits and credits to be brought into account for the purposes of [F610 that PartF610] in relation to the relevant transaction as would have been brought into account if the transaction had been a disposal of the old asset at the market value mentioned in [F612 subsection (6) aboveF612] .

[F613 This subsection does not apply in relation to a [F614 relevant loan relationship transactionF614] .F613,F609]]

[F615 (8AA) In subsection (8A) “relevant loan relationship transaction” means a transaction to which any of the following provisions applies—

  • section 342 of CTA 2009 (continuity of treatment on transfers within groups or reorganisations: issues of new securities on reorganisations: disposal at notional carrying value),

  • section 343 of that Act (continuity of treatment on transfers within groups or reorganisations: receiving company using fair value accounting),

  • section 424 of that Act (European cross-border transfers of business: reorganisations involving loan relationships),

  • section 425 of that Act (European cross-border transfers of business: original holder using fair value accounting),

  • section 435 of that Act (European cross-border mergers: reorganisations involving loan relationships),

  • section 436 of that Act (European cross-border mergers: original holder using fair value accounting).F615]

F608[F616 (8B)Subsection (8A) above does not apply where the relevant transaction is a conversion of securities occurring in consequence of the operation of the terms of any security or of any debenture which is not a security.

Expressions used in this subsection have the same meaning as they have for the purposes of section 132.F616]

(9)In any case where the old asset consists of a qualifying corporate bond, then, so far as it relates to the old asset and the new asset, the relevant transaction shall be treated for the purposes of this Act as a disposal of the old asset and an acquisition of the new asset.

(10)Except in a case falling within subsection (9) above, so far as it relates to the old asset and the new asset, the relevant transaction shall be treated for the purposes of this Act as not involving any disposal of the old asset but—

(a)there shall be calculated the chargeable gain or allowable loss that would have accrued if, at the time of the relevant transaction, the old asset had been disposed of for a consideration equal to its market value immediately before that transaction; and

(b)subject to subsections (12) to (14) below, the whole or a corresponding part of the chargeable gain or allowable loss mentioned in paragraph (a) above shall be deemed to accrue on a subsequent disposal of the whole or part of the new asset (in addition to any gain or loss that actually accrues on that disposal); and

(c)on that subsequent disposal, section 115 shall have effect only in relation to any gain or loss that actually accrues and not in relation to any gain or loss which is deemed to accrue by virtue of paragraph (b) above.

(11)Subsection (10)(b) and (c) above shall not apply to any disposal falling within section 58(1), 62(4), 139, [F617140A,F617][F618 140E,F618][F619 or 171(1)F619] , but a person who has acquired the new asset on a disposal falling within any of those sections (and without there having been a previous disposal not falling within any of those sections or a devolution on death) shall be treated for the purposes of subsection (10)(b) and (c) above as if the new asset had been acquired by him at the same time and for the same consideration as, having regard to subsections (5) to (8) above, it was acquired by the person making the disposal.

(12)In any case where—

(a)on the calculation under subsection (10)(a) above, a chargeable gain would have accrued, and

(b)the consideration for the old asset includes such a sum of money as is referred to in subsection (7) above,

then, subject to subsection (13) below, the proportion of that chargeable gain which that sum of money bears to the market value of the old asset immediately before the relevant transaction shall be deemed to accrue at the time of that transaction.

(13)F620,F620If ... the sum of money referred to in subsection (12)(b) above is small, as compared with the market value of the old asset immediately before the relevant transaction, ... subsection (12) above shall not apply.

(14)In a case where subsection (12) above applies, the chargeable gain which, apart from that subsection, would by virtue of subsection (10)(b) above be deemed to accrue on a subsequent disposal of the whole or part of the new asset shall be reduced or, as the case may be, extinguished by deducting therefrom the amount of the chargeable gain which, by virtue of subsection (12) above, is deemed to accrue at the time of the relevant transaction.

(15)In any case where—

(a)the new asset mentioned in subsections (10) and (11) above is a qualifying corporate bond in respect of which an allowable loss is treated as accruing under section 254(2), and

(b)the loss is treated as accruing at a time falling after the relevant transaction but before any actual disposal of the new asset subsequent to the relevant transaction,

then for the purposes of subsections (10) and (11) above a subsequent disposal of the new asset shall be treated as occurring at (and only at) the time the loss is treated as accruing.

[F621 (16)This section has effect for the purposes of corporation tax notwithstanding anything in [F622 section 464(1) of CTA 2009F622] (matters to be brought into account in the case of loan relationships only under [F622 Part 5F622] of that Act).F621]

Definitions used in section 116 18

original shares

(4) In sub-paragraph (1) “original shares” and “new holding” shall be construed in accordance with sections 126, 127, 135 and 136.

Defined in Sch.7AC para.14(4) · see it in the full Act
the original shares

(4) Sub-paragraph (5) applies if corresponding bonus shares are issued in respect of all or some of the relevant SEIS shares (“the original shares”) to which relief is attributed under this paragraph.

Defined in Sch.5BB para.4(4) · see it in the full Act
qualifying

(a) is a “qualifying” corporate bond if it is issued after 13th March 1984; and

Defined in s.117(7) · see it in the full Act
new holding

(5) In sub-paragraph (2) above “new holding” shall be construed in accordance with sections 126, 127, 135 and 136.

Defined in Sch.5B para.9(5) · see it in the full Act

(4) In sub-paragraph (1) “original shares” and “new holding” shall be construed in accordance with sections 126, 127, 135 and 136.

Defined in Sch.7AC para.14(4) · see it in the full Act
securities

(6) In sub-paragraph (4)(d) “securities” has the same meaning as in section 132.

Defined in Sch.4B para.12(6) · see it in the full Act

(2) In sub-paragraph (1)(a) “securities” has the same meaning as in section 132.

Defined in Sch.4B para.7(2) · see it in the full Act
the relevant transaction

In this subsection “old asset” and “the relevant transaction” have the meaning given by section 116.

Defined in s.151BB(2) · see it in the full Act
shares

“shares” includes stock;

Defined in s.288(1) · see it in the full Act

(5) In this paragraph, except in paragraphs (a) to (c) of sub-paragraph (6), “shares” includes an interest in shares.

Defined in Sch.7AC para.10(5) · see it in the full Act

(b) “shares” includes securities,

Defined in Sch.7 para.4(2) · see it in the full Act
the shares

(5) In sub-paragraphs (3) and (4) and in the following provisions of this Schedule references to “the shares” are to the shares referred to in sub-paragraph (1)(a).

Defined in Sch.7ZB para.1(5) · see it in the full Act

(a) references to “the shares” shall be construed in accordance with sub-paragraph (1) above, and

Defined in Sch.5B para.13(12) · see it in the full Act
tax

and for the purposes of this definition “tax” means capital gains tax, corporation tax or income tax.

Defined in s.16A(2) · see it in the full Act
assets

(a) the reference to “assets” were a reference to “property”, and

Defined in Sch.4ZA para.22(2) · see it in the full Act
asset

In this sub-paragraph “asset” includes part of an asset.

Defined in Sch.8B para.6(1) · see it in the full Act
company

“company” includes any body corporate or unincorporated association but does not include a partnership, and shall be construed in accordance with section 99 ;

Defined in s.288(1) · see it in the full Act

(5) In this paragraph “company” and “group” shall be construed in accordance with section 170(2) to (9).

Defined in Sch.2 para.5(5) · see it in the full Act
old asset

In this subsection “old asset” and “the relevant transaction” have the meaning given by section 116.

Defined in s.151BB(2) · see it in the full Act
the new assets

Any shares so received by the transferor in exchange for the business are referred to below as “the new assets”.

Defined in s.162(1) · see it in the full Act
market value

(5AA) In this Act “market value” in relation to shares of a given class in an open-ended investment company the prices of which are published regularly by the authorised corporate director of that company (whether or not those shares are also quoted in The Stock Exchange Daily Official List) shall mean an amount equal to the price so published on the relevant date, or if no price was published on that date, on the latest date before that date.

Defined in s.272(5AA) · see it in the full Act

(5) In this Act “market value” in relation to any rights of unit holders in any unit trust scheme the buying and selling prices of which are published regularly by the managers of the scheme shall mean an amount equal to the buying price (that is the lower price) so published on the relevant date, or if none were published on that date, on the latest date before.

Defined in s.272(5) · see it in the full Act

(1) In this Act “market value” in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market.

Defined in s.272(1) · see it in the full Act

(4) In particular, for the purposes of paragraphs 5 and 7 of this Schedule “market value” has the meaning given by paragraph 92 of Schedule 2 to that Act (determination of market value); and Part 8 of this Act has effect subject to this paragraph.

Defined in Sch.7D para.1(4) · see it in the full Act
CTA 2009

“CTA 2009” means the Corporation Tax Act 2009 ;

Defined in s.288(1) · see it in the full Act
group

(5) In this paragraph “company” and “group” shall be construed in accordance with section 170(2) to (9).

Defined in Sch.2 para.5(5) · see it in the full Act
allowable loss

“allowable loss” shall be construed in accordance with sections 8(2) , 16 , 16A , 261B, 261D and 263ZA ;

Defined in s.288(1) · see it in the full Act

(1) For the purposes of this Act, “allowable loss” does not include a loss accruing to a person if—

(a)it accrues to the person directly or indirectly in consequence of, or otherwise in connection with, any arrangements, and

(b)the main purpose, or one of the main purposes, of the arrangements is to secure a tax advantage.

Defined in s.16A(1) · see it in the full Act

Cases considering section 116 5

Hancock and another v Commissioners for Her Majesty’s Revenue and Customs

[2019] UKSC 24 · 22 May 2019Interprets

The provision preserved rollover treatment where the statutory conditions concerning qualifying corporate bonds were satisfied. Its application meant that the accrued gain on the non-qualifying bonds was deferred rather than exempted (see paras [6]-[7]; [27]). A transaction converting qualifying and non-qualifying corporate bonds into qualifying bonds is treated as comprising separate conversions. The accrued gain on the non-qualifying bonds consequently remains within rollover treatment (see paras [19]-[23]; [27]). The Court of Appeal treated its use of “constitute” as consistent with excluding mixed conversions from section 116(1)(b). The Supreme Court recorded but did not rely upon that reasoning (see para [12]). The Court of Appeal treated its use of “constitute” as consistent with excluding mixed conversions from section 116(1)(b). The Supreme Court recorded but did not rely upon that reasoning (see para [12]).

Hancock & Anor v Revenue & Customs

[2017] EWCA Civ 198 · 25 May 2017Disapplies

The court held that the gateway to section 116 is assessed through the properly characterised conversion under section 132. The arrangements therefore comprised separate conversions, rather than one mixed conversion outside the section. (see [57]-[68]; [75]) The requirement that sections 127-130 would apply by virtue of Chapter 2 directed the court first to section 132. This established the need to characterise the relevant conversion before applying section 116. (see [57]-[61]) The phrase allowing original shares to consist of or include a QCB did not permit a mixed-input conversion to defeat section 116. Read within the statutory scheme, it was an isolated anomaly and not a route by which latent non-QCB gains could escape tax. (see [67]-[71]; [75]; [88]-[89]) For a non-QCB converted into a QCB, the latent gain is calculated at conversion and deemed to accrue on later disposal of the QCB. The court applied that frozen-gain mechanism to the 08/00 Loan Notes on redemption of the SDLs. (see [24]-[25]; [28]; [68]; [75]; [87]-[89]) The provision requires calculation of the gain or loss that would have accrued on a market-value disposal of the old asset at conversion. It forms the first step of the frozen-gain mechanism applied to the non-QCB Loan Notes. (see [24]-[25]; [75]) The calculated gain is deemed to accrue on later disposal of the new asset. The court held that this consequence applied when the SDLs were redeemed. (see [24]-[25]; [28]; [75]) Section 115 exempts only the actual gain or loss on the QCB, not the frozen gain deemed to accrue under section 116(10)(b). The court applied this distinction to deny exemption for the latent gain on the non-QCB notes. (see [24]-[25]; [67]-[71]; [85]-[87]) The court held that section 116(2) was not inconsistent with treating the relevant transaction as the individual conversion and excluding mixed inputs. Its amendment history did not require a contrary construction. (see [72]) The reference to a QCB constituting the old asset was consistent with, though not decisive of, an unmixed-conversion analysis. The court acknowledged a drafting puzzle but did not allow it to determine the result. (see [73]; [88]) The reference to a QCB constituting the new asset was consistent with, though not decisive of, an unmixed-conversion analysis. The court treated any drafting anomaly as subordinate to the statutory scheme. (see [73]; [88]) Where section 116 applies, section 127 does not apply to the old and new assets. The court applied that consequence to prevent rollover of the gain on the 08/00 Loan Notes into exempt SDLs. (see [24]; [28]; [68]) The court described section 116(9) as treating a conversion where the old asset is a QCB as a deemed disposal, without imposing tax on the exempt QCB gain. It illustrated the operation of the unmixed scheme. (see [24]; [87])

DMWSHNZ Ltd v HM Revenue and Customs

[2015] EWCA Civ 1036 · 20 October 2015

Applies the deferred-gain mechanism for an exchange of shares for qualifying corporate bonds, under which the relevant gain is deemed to accrue on a subsequent disposal of the new asset. It did not displace the analysis that repayment disposed of the debt before any later cancellation of the notes. (see paras [49]-[57])

What each judgment says about section 116 is in the case-law panel in the full Act.

Amendments and notes

30 notes from legislation.gov.uk

Amendments

  1. F606Words in s. 116(2) inserted (with effect in accordance with s. 88(6) of the amending Act) by Finance Act 1997 (c. 16), s. 88(4)
  2. F607S. 116(4A) inserted (with effect in accordance with s. 105(1) of the amending Act) by Finance Act 1996 (c. 8), Sch. 14 para. 60(2) (with Sch. 15)
  3. F608S. 116(8A)(8B) ceased to have effect by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2007 (S.I. 2007/3186), Sch. 1 para. 10, but that ceasing to have effect deemed never to have had effect by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2008 (S.I. 2008/1579), regs. 1(2), 5
  4. F609S. 116(8A) inserted (with effect in accordance with s. 105(1) of the amending Act) by Finance Act 1996 (c. 8), Sch. 14 para. 60(3) (with Sch. 15)
  5. F610Words in s. 116(8A) substituted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 366(2)(a) (with Sch. 2 Pts. 1, 2)
  6. F611Words in s. 116(8A) inserted (with effect in accordance with Sch. 6 para. 8(3) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 6 para. 8(1)(a)
  7. F612Words in s. 116(8A) substituted (with effect in accordance with Sch. 6 para. 8(3) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 6 para. 8(1)(b)
  8. F613Words in s. 116(8A) inserted (with effect in accordance with reg. 3 of the amending S.I.) by The Corporation Tax (Implementation of the Mergers Directive) Regulations 2008 (S.I. 2008/1579), reg. 1(2), Sch. 1 para. 2
  9. F614Words in s. 116(8A) substituted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 366(2)(b) (with Sch. 2 Pts. 1, 2)
  10. F615S. 116(8AA) inserted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 366(3) (with Sch. 2 Pts. 1, 2)
  11. F616S. 116(8B) inserted (with effect in accordance with Sch. 6 para. 8(3) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 6 para. 8(2)
  12. F617Words in s. 116(11) inserted (retrosp.) by 1992 c. 48, s. 46(1)(3)
  13. F618Word in s. 116(11) inserted (with effect in accordance with s. 64(5) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), s. 64(1)
  14. F619Words in s. 116(11) substituted (with effect in accordance with Sch. 29 para. 19(2) of the amending Act) by Finance Act 2000 (c. 17), Sch. 29 para. 19(1) (with Sch. 29 para. 46(5))
  15. F620Words in s. 116(13) repealed (with effect in accordance with s. 134(2) of the amending Act) by Finance Act 1996 (c. 8), Sch. 20 para. 51, Sch. 41 Pt. V(10)
  16. F621S. 116(16) inserted (with effect in accordance with s. 105(1) of the amending Act) by Finance Act 1996 (c. 8), Sch. 14 para. 60(4) (with Sch. 15)
  17. F622Words in s. 116(16) substituted (with effect in accordance with s. 1329(1) of the amending Act) by Corporation Tax Act 2009 (c. 4), s. 1329(1), Sch. 1 para. 366(4) (with Sch. 2 Pts. 1, 2)

Modifications

  1. C182S. 116 modified (with effect in accordance with s. 105(1) of the amending Act) by Finance Act 1996 (c. 8), s. 98, Sch. 10 para. 5(1)(3)
  2. C183S. 116 modified (with effect in accordance with s. 105(1) of the amending Act) by Finance Act 1996 (c. 8), s. 105, Sch. 15 para. 30(2)
  3. C184S. 116 excluded (24.7.1996) by Broadcasting Act 1996 (c. 55), s. 149(1), Sch. 7 para. 7(1)(b) (with Sch. 7 para. 9(1))
  4. C185S. 116 modified (with effect in accordance with s. 66(1) of the amending Act) by Finance Act 1999 (c. 16), s. 66(2)
  5. C186S. 116 applied (with effect in accordance with s. 63(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 15 para. 80(1)
  6. C187S. 116 modified (with effect in accordance with s. 63(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 15 para. 88
  7. C188S. 116 modified by Finance Act 1996 (c. 8), s. 91G(3)-(8) (as inserted (with effect in accordance with Sch. 7 para. 10(7) of the amending Act) by Finance (No. 2) Act 2005 (c. 22), Sch. 7 para. 10(6))
  8. C189S. 116 excluded by Income Tax Act 2007 (c. 3), s. 809FZD(4) (as inserted (with effect in accordance with s. 37(4) of the amending Act) by Finance Act 2016 (c. 24), s. 37(2))
  9. C190S. 116 excluded (for the tax year 2026-27 and subsequent tax years (but in relation to investment management services whenever performed)) by 2005 c. 5, Sch. A1 para. 15(4) (as inserted by Finance Act 2026 (c. 11), s. 58(6), Sch. 11 para. 1)
  10. C191S. 116(10) excluded (with effect in accordance with s. 63(4) of the amending Act) by Finance Act 2000 (c. 17), Sch. 15 para. 81(2)
  11. C192S. 116(10) excluded (with effect in accordance with reg. 1(2) of the amending S.I.) by The Authorised Investment Funds (Tax) Regulations 2006 (S.I. 2006/964), regs. 1(1), 66(1)
  12. C193S. 116(10)(a) modified (with effect in accordance with reg. 1(2) of the amending S.I.) by The Exchange Gains and Losses (Bringing into Account Gains or Losses) Regulations 2002 (S.I. 2002/1970), regs. 1(1), 9(4)(a)

Marginal citations

  1. M121984 c. 43.