When does section 138ZA of the Taxation of Chargeable Gains Act 1992 apply?

Section 138ZA applies when shares or debentures in a UK-incorporated close company are exchanged for shares or debentures in a non-UK-incorporated close company under a share exchange or reconstruction, and the individual receiving the new securities is a participator with a material interest exceeding 5% in both companies at the relevant times.

What is a material interest for the purposes of section 138ZA TCGA 1992?

A material interest means the individual, alone or together with associates, beneficially owns or controls more than 5% of the ordinary share capital of the company, or possesses rights entitling them to receive more than 5% of the company's assets available for distribution on a winding up or in other circumstances.

How does the close company definition differ under section 138ZA?

The close company definition under section 138ZA follows the standard Corporation Tax Act 2010 rules but with an important modification: non-UK resident companies are not automatically excluded. This means a company incorporated outside the United Kingdom can be treated as a close company if it otherwise meets the criteria.

What is the consequence when all conditions of section 138ZA are met?

When all conditions of section 138ZA are met, section 138ZB applies to determine the tax treatment of the exchanged securities. This prevents an individual with a significant stake in a UK-incorporated close company from avoiding capital gains tax obligations by moving the corporate structure offshore through a share exchange or reconstruction.

Taxation of Chargeable Gains Act 1992 section 138ZA

Share exchanges involving non-UK incorporated close companies

Section 138ZA sets out the conditions under which special tax treatment applies when shares or debentures in a UK-incorporated close company are exchanged for shares or debentures in a non-UK-incorporated close company, and the person receiving the new securities is an individual with a significant interest in both companies.

The section applies where shares or debentures are issued by a non-UK-incorporated close company in exchange for shares or debentures in a UK-incorporated close company, under the normal share exchange or reconstruction provisions.
The individual receiving the new shares or debentures must have a material interest (more than 5% of ordinary share capital or entitlement to more than 5% of assets on winding up) in both companies, and must be a participator in both.
Associates' holdings are counted together with the individual's own holdings when determining whether the 5% material interest threshold is met.
The close company definition used for this section includes non-UK resident companies, which are normally excluded from the standard close company rules.

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