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CG46165 | Groups: indexation allowance restriction: redeemable preference shares

From HM Revenue & Customs · Capital Gains Manual

The definition of `redeemable preference shares' is set out in CG46140. The provisions which apply to restrict indexation allowance in the case of a debt on a security could not be applied directly to redeemable preference shares because of the pooling rules. The shares which constitute a single holding may have been acquired at various times, before and after the companies became linked. Section 183(2) TCGA 1992 accordingly makes a just and reasonable reduction of the indexation on the disposal. The following instructions set out the extent of the reduction which may be considered just and reasonable.

If a company disposes of its entire holding of redeemable preference shares in another company and the companies were linked

  • immediately before the disposal, and

  • immediately after the acquisition of the holding

no indexation allowance is due on the disposal.

If a company disposes of redeemable preference shares in another company and the companies

  • were linked immediately before the disposal, but

  • did not become linked until after the latest acquisition of the shares

then the indexation allowance should be restricted. In this situation it would be just and reasonable to restrict indexation to that for the period ending when the companies first became linked. As in the case of debts on a security this involves substituting the RPI for the month in which the companies became linked (or the RPI for March 1982 if later) for the RPI for the month of actual disposal (RD) in the indexation formula

Cost x RD ( RI

RD

Where a disposal of redeemable preference shares represents a part-disposal of a larger pooled holding, and not all the shares were acquired when the companies were linked, this requires a more complex apportionment. CG46220 sets out a suggested method. You should consider any alternative apportionment proposed by the company on its merits.

The rules for redeemable preference shares are modified if the shares were acquired or disposed of on a reorganisation, see CG46195+.