HMRC Clarifies Tax Position Of Northern Rock Shareholders

by Jason Gorringe, Tax-News.com, London

10 July 2008

HM Revenue and Customs (HMRC)on Wednesday published a brief setting out its understanding of the consequences of the transfer of Northern Rock plc into temporary public ownership in relation to the capital gains tax position of former shareholders in Northern Rock plc, and the income tax and capital gains tax position of those who held shares and share options under employee share schemes.

According to the brief, sections 3 and 4 of The Banking (Special Provisions) Act 2008 give powers for the Treasury to order the transfer of securities issued by an authorised UK deposit-taker and powers for extinguishing rights to subscribe for, or otherwise acquire, securities of the deposit-taker in question. The Act received Royal Assent on 21st February 2008.

The powers in sections 3 and 4 of the Act were exercised in the Northern Rock plc Transfer Order 2008 [Statutory Instrument 2008 No.432]. The Transfer Order was made on 21st February 2008 and came into force on 22nd February.

Under Article 2 of the Transfer Order, shares in Northern Rock plc were transferred to the Treasury. The shares in question are the ordinary shares, foundation shares and preference shares issued by the company.

Under Article 4 of the Transfer Order rights (or other entitlement) to receive shares in the company (whether by subscription, conversion or otherwise) were extinguished. The rights which were extinguished included rights granted by reason of, or in connection with, a person’s office or employment with Northern Rock plc, or any of its group undertakings.

In accordance with section 5 of the Act, the Treasury has also made an order for a scheme for compensation for the transfer of shares and extinguishing of rights to receive shares.

The Northern Rock plc Compensation Scheme Order 2008 [Statutory Instrument 2008 No.718] came into force on 13th March.

With regard to the capital gains tax implications of the government rescue of the bank, HMRC "considers that the entire loss to the shareholder of his or her shares under the Transfer Order is an occasion of disposal under section 24(1) of the Taxation of Chargeable Gains Act 1992 (TCGA). The time of the disposal will be 22 February 2008, the date the Transfer Order came into force, which falls in the tax year 2007-08".

It continued: "As no consideration was received for the shares, the disposal on 22 February will normally give rise to a loss in respect of any allowable costs of acquisition...Where the disposal includes 'free' shares received by the same holder when Northern Rock demutualised in 1997, those shares will not have any cost for capital gains purposes."

The brief went on to explain that: "Losses arising under section 24(1) TCGA can be set against chargeable gains in the usual way. The latest date for claiming losses arising in 2007-08 is 31 January 2014."

"Any payment under the Compensation Scheme Order will be chargeable to CGT under section 22(1)(a) TCGA as a capital sum derived from the recipient's former shareholding."

"The charge to CGT will arise in the tax year in which the compensation is received."

"Where a former shareholder has not claimed a capital loss under section 24(1) TCGA, see paragraphs 7 to 9 above, any allowable costs incurred in acquiring the shares may be deducted from the compensation in arriving at the gain arising under section 22(1)(a) TCGA."

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