21Sale of shares in certain trading companies
(1)Where in the case of a company carrying on—
(a)a trade of dealing in securities or land or buildings, or of developing land, or
(b)any other trade such that the value of any one object which forms part of or constitutes the trading stock belonging to the company at the time of the sale hereinafter mentioned amounts to one-fifth or more of the value of the net assets of the company,
shares in the company are sold after the fifth day of April, nineteen hundred and sixty, to a person who has, or in consequence of the sale will have, control of the company, and apart from this section the consideration would not be a receipt of an income nature in the hands of the seller, the following provisions shall have effect.
(2)If on the surveyor certifying to the Commissioners having jurisdiction in the matter particulars showing that the case falls within the foregoing subsection, and giving notice thereof in writing to the seller, it is not shown to the satisfaction of those Commissioners that all trading stock belonging to the company at the time of the sale has been or will be disposed of either in the course of its trade or to a person carrying on a trade such that the stock will be trading stock in his hands, the consideration shall be deemed to be income of the seller (and, if the seller is a company to which section two hundred and forty-five of the Act of 1952 (surtax on undistributed income of certain companies) applies, to be investment income) up to the amount specified in the next following subsection, and shall be chargeable under Case VI of Schedule D accordingly.
(3)Subject to the next following subsection, the said amount is the appropriate proportion of the amount (if any) of profits or gains of the company chargeable to tax which would have been produced by the company receiving, at the time of the sale, consideration for the sale of its trading stock equal to the following amount, that is to say, the amount of the proper consideration for all the issued shares in the company—
(a)reduced by any excess of the aggregate of the values specified in subsection (5) of this section over the aggregate liabilities of the company at the time of the sale, or
(b)increased by any excess of the said aggregate liabilities over the aggregate of the said values.
(4)Where the said amount exceeds the difference between the actual consideration for the sale of the shares and the consideration for which the seller bought them (or, if he acquired them otherwise than by buying them, their value on a sale in the open market at the time when he acquired them), and—
(a)immediately before the time of the sale the shares belonging to the seller amounted to less than five per cent. of the shares issued by the company (regard being had to any differences in the nature of the shares or the rights attaching thereto), or
(b)subsection (2) of this section has had effect, in relation to all or any of the same trading stock on a previous sale of the shares,
then if not later than six years after the end of the year of assessment the seller applies in writing to the Commissioners of Inland Revenue for relief, and, in the case of an application made only by virtue of paragraph (a) of this subsection, shows to the satisfaction of those Commissioners that he did not acquire his shares in pursuance of arrangements for transferring control of the company to another person, the Commissioners of Inland Revenue shall give, by repayment or otherwise, such relief (if any) as may be reasonable and just.
Any applicant aggrieved by a decision of the Commissioners of Inland Revenue under this subsection may, on giving notice in writing within thirty days after the notification of the decision, appeal to the General Commissioners having jurisdiction in the matter of the assessment under this section, or if he so elects to the Special Commissioners, and the provisions of the Act of 1952 relating to such an appeal (including the provisions relating to the statement of a case for the opinion of the High Court on a point of law) shall apply with any necessary modification.
(5)The values referred to in paragraphs (a) and (b) of subsection (3) of this section are the following, that is to say—
(a)the value of any assets of the company in respect of which capital allowances have been made (which shall be taken to be the amount of the capital expenditure of the company on the construction or provision of the assets unallowed as at the time of the sale),
(b)the value of the goodwill of the business of the company, to the extent (if any) that consideration was given therefor on a transaction between independent persons dealing at arm's length, and
(c)the value at the time of the sale of other assets of the company not being trading stock, ascertained as on a sale in the open market.
(6)For the purposes of this section the proper consideration for all the issued shares in a company shall be the actual consideration for the sale of shares mentioned in subsection (1) of this section increased (unless that sale was of all the issued shares) in the proportion which the total number of issued shares bears to the number of shares sold:
Provided that where the issued shares of the company are not all of the same nature or do not all have the same rights attaching thereto and the said sale was not of all the issued shares, the proper consideration for all the issued shares in the company shall be ascertained for the purposes of this section by aggregating the value of the trading stock of the company, ascertained as on a sale in the open market at the time of the sale of shares, and the values mentioned in paragraphs (a) to (c) of the foregoing subsection and deducting therefrom the aggregate amount of the liabilities of the company at that time.
(7)For the purposes of subsection (3) of this section the appropriate proportion, in relation to any sale of shares, is the proportion which the actual consideration for that sale bears to the proper consideration for all issued shares in the company, so however that where the proviso to the foregoing subsection has effect the appropriate proportion is such proportion as may be just having regard to the number and nature of the shares sold and the rights attaching thereto, as compared with the number and nature of all the issued shares in the company and the rights or different rights attaching thereto.
(8)Any tax chargeable on the seller by virtue of the foregoing provisions of this section and not paid by him shall be recoverable from the company, and where the seller is an individual the amount which (by virtue of subsection (2) of this section) is deemed to be income of his shall be deemed for the purposes of this subsection to be the highest part of his income.
(9)The following provisions shall have effect where in pursuance of this subsection a person proposing to sell shares in such circumstances that the sale would fall within subsection (1) of this section and the person proposing to buy the shares furnish to the Commissioners of Inland Revenue particulars of the proposed transaction, that is to say:—
(a)if the Commissioners are of opinion that the particulars, or any further information furnished in pursuance of this paragraph, are not sufficient for the purposes of this subsection, they shall within thirty days of the receipt thereof notify to the said persons what further information they require for those purposes, and unless that further information is furnished to the Commissioners within thirty days from the notification or such further time as the Commissioners may allow they shall not be required to proceed further under this subsection ;
(b)subject to the foregoing paragraph, the Commissioners shall within thirty days of the receipt of the particulars, or where that paragraph has effect of all further information required, notify the said persons whether the Commissioners are satisfied that the trading stock will be disposed of as mentioned in subsection (2) of this section;
and if the Commissioners notify the said persons that they are so satisfied, the surveyor shall not give a certificate under subsection (2) of this section in respect of a sale of shares in the company by the one of the said persons to the other which is carried out within six months after the notification by the Commissioners.
(10)Where under subsection (1) of this section any amount would have been deemed to be income of the seller if subsection (2) of this section had had effect, and on the sixth anniversary of the sale any asset which was trading stock of the company at the time of the sale, or any part of or interest in such an asset, is still held by the company, then, unless the company has ceased to carry on the trade or it is shown to the satisfaction of the said Commissioners that the retention of the asset was for bona fide reasons connected with the trade, income of the like amount shall be deemed to have been received by the company on the said anniversary and shall be chargeable under Case VI of Schedule D accordingly.
(11)If after the sale of the shares any receipts accrue (whether in money or in money s worth) from the sale of stock which was trading stock of the company at the time of the sale of the shares, or as the result of any other dealing with any of that trading stock, or any dealing with anything constructed, produced or derived therefrom, or by way of compensation for (including insurance moneys payable in respect of) the loss or destruction of or damage to any such trading stock or anything constructed, produced or derived therefrom, the receipts shall be disregarded for income tax purposes if and to the extent that it is just so to do having regard to any tax charged under the foregoing provisions of this section (being tax charged at the standard rate):
Provided that nothing in this subsection shall be construed as requiring receipts to be disregarded in so far as they are in the nature of rent or hire.
(12)If after the sale of the shares, in a case not falling within the proviso to subsection (6) of this section, a balancing charge falls to be made in respect of any asset of the company falling within paragraph (a) of subsection (5) of this section, the amount on which the charge is made shall not exceed the aggregate of—
(a)the appropriate proportion of what would have been the maximum amount of the balancing charge if the asset had been bought by the company at the time of the sale of the shares for a price equal to the amount unallowed at the time of the sale of the capital expenditure actually incurred by the company on the construction or provision of the asset, the said maximum amount being ascertained on the footing that no initial allowance fell to be made, and
(b)the amount which apart from this subsection would be the maximum amount of the balancing charge less the appropriate proportion of that amount.
(13)In this section " the Commissioners having jurisdiction in the matter ", in relation to any sale of shares in a company, means the Commissioners having jurisdiction with respect to the making of assessments under Schedule D on the company or, if more than one body of Commissioners has such jurisdiction, such of those bodies as the Commissioners of Inland Revenue may direct; and the Commissioners having jurisdiction in the matter shall in any case have jurisdiction with respect to the making of an assessment on the seller in respect of any amount in respect of which he is chargeable under this section.