What is the subsidiary exemption under TCGA 1992 Schedule 7AC paragraph 2?

The subsidiary exemption extends the substantial shareholding exemption to disposals of assets related to shares, such as options or convertible securities. If a direct disposal of the underlying shares would have qualified for the main exemption under paragraph 1, then the gain on disposing of the related asset is also exempt from corporation tax on chargeable gains.

What are the two alternative qualifying conditions for the subsidiary exemption?

Under the first condition, Company A itself holds shares in Company B and a hypothetical disposal of those shares would qualify for the main exemption. Under the second condition, Company A does not hold shares but is in a group where another member does, and the main exemption would have applied had Company A held those shares instead.

How does the subsidiary exemption apply when a company is in liquidation?

When a company enters liquidation and its assets vest in a liquidator, the provision treats those assets as still belonging to the company. The liquidator's actions are treated as the company's own actions, and any transfers between the company and the liquidator are disregarded. This ensures the subsidiary exemption can still apply despite the legal transfer of assets.

Can the subsidiary exemption be denied even if the qualifying conditions are met?

Yes. The subsidiary exemption is subject to the same exclusions as the main exemption. The excluded circumstances set out in paragraphs 5 and 6 of Schedule 7AC can prevent the exemption from applying even where the qualifying conditions are otherwise satisfied. Advisers should always check these exclusions before concluding that a disposal is exempt.

Taxation of Chargeable Gains Act 1992 Schedule 7AC paragraph 2

Subsidiary exemption: disposal of asset related to shares where main exemption conditions met

Section 2 provides a subsidiary exemption from chargeable gains tax when a company disposes of an asset related to shares in another company, provided that the main exemption conditions under paragraph 1 would have applied to a disposal of the underlying shares themselves.

A gain on the disposal of an asset related to shares in another company (Company B) by a company (Company A) is exempt from tax if Company A holds shares in Company B immediately before the disposal and a sale of those shares would itself qualify for the main exemption under paragraph 1
The exemption also applies where Company A does not itself hold the shares in Company B, but another company within the same group does, provided that the main exemption would have applied had Company A held those shares instead
Where a company is in liquidation and its assets are vested in a liquidator, the assets are treated as still belonging to the company and the liquidator's actions are treated as the company's actions, ensuring the exemption can still apply
This subsidiary exemption does not apply in certain excluded circumstances specified in paragraphs 5 and 6 of the Schedule

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