CGT on Foreign Debt Restructuring into a Private Co.

[s445203]

I bought £113k of US corporate debt of a company in Ch. 11. in August 2018.
In December 2018 as part of emerging from Ch. 11, I received:
£18k of cash
£37k of new bonds
some shares in the newly emerged company, which are private, but had a book value of £106k on December 31st 2018.

In June 2019 the new bonds repaid their due at the £37k par so I am now just left with private shares whose value I don't know how to determine.

What is the right CGT treatment for the re-org given the private shares? I have no idea whether they're actually woth book value or not so that doesn't seem an appropriate yardstick to use?

The only way I can see around not knowing what the shares are worth would be to realise a loss of £58k (£113k cost minus cash and bonds received) in December 2018 and then hold the shares at a zero cost basis (i.e. whatever I eventually sell them for would be a 100% gain) but would Mr. Tax Man agree with that?

Thanks in advance for any help

[s445203]

Well, I’ll have a go at answering my own question with references to the legislation.

Step 1
Shares and debt securities are treated similarly for CGT purposes according to CGT Section 132 3(i) or 3(iii). https://www.legislation.gov.uk/ukpga/1992/12/section/132

Therefore my bonds are treated like shares, to which the CGT tax act mostly refers to.

Step 2
CGT Section 127 (https://www.legislation.gov.uk/ukpga/1992/12/section/127) states

"Subject to sections 128 to 130, a reorganisation shall not be treated as involving any disposal of the original shares or any acquisition of the new holding or any part of it, but the original shares (taken as a single asset) and the new holding (taken as a single asset) shall be treated as the same asset acquired as the original shares were acquired.”

Therefore it looks like I ought to be allocating all my original cost minus anything received against the new shares, and a chargeable event has not actually arisen during the cancellation of the original bonds and the issue of the new bonds, shares and cash.

Step 3
CGT Section 128 part 1 (https://www.legislation.gov.uk/ukpga/1992/12/section/128)

States that

Subject to subsection (2) below, where, on a reorganisation, a person gives or becomes liable to give any consideration for his new holding or any part of it, that consideration shall in relation to any disposal of the new holding or any part of it be treated as having been given for the original shares, and if the new holding or part of it is disposed of with a liability attaching to it in respect of that consideration, the consideration given for the disposal shall be adjusted accordingly.

Therefore the cash and bonds I have received are like a liability I will apply to proceeds when I sell the private shares. The gain generated on exit will be equal to sale proceeds minus this liability minus original acquisition cost.

Therefore, my conclusions are:
1. No gain occurs on the date my bonds got cancelled.
2. I allocate my initial cost minus what i have received in cash and new bonds as my cost basis for the shares.
3. When I sell the shares, a chargeable event will occur

Does anyone agree/disagree with the above?

Thanks in advance!

[jerome.lane]

Debt for equity swaps are generally tax neutral. thee are traps if the shares aren't ordinary share capital or your are otherwise connected to the company but on the face of it, you now have shares with a base cost of £58k.

[s445203]

Much obliged Jerome - that's where I'd got to as well. Thanks for taking the time.