IFM40540 - Group issues: transfers of assets

FA22/SCH2/PARA36

Gain or loss arising where TCGA92/S179 applies to a transfer of assets

The de-grouping charge rules at TCGA192/S179 deal with companies ceasing to be a member of a group (CG45400). Where those rules apply, a chargeable gain/allowable loss can arise when assets have been transferred intra-group, and the transferee subsequently leaves the group.

The broad effect of the de-grouping rules is to tax the gain that would have accrued on an earlier no gain/no loss intra-group disposal if the asset in question leaves the group otherwise than by way of a disposal of the asset. The company leaving the group with the asset is deemed to have disposed of and reacquired the asset at market value immediately after the time it acquired the asset from another group company and realise the gain or loss that would otherwise have arisen at the time of the intra-group disposal.

However, if the company to which the transfer was made still has the asset and leaves the group as a result of a disposal by a group member of the shares in that transferee company (or another group member) then instead of the de-grouping gain or loss arising in the transferee company the consideration treated as received by the group company disposing of the shares is adjusted to take account of the gain or loss that would have otherwise accrued to the transferee company.

The application of those de-grouping rules is amended by FA22/SCH2/PARA36, to ensure the correct interaction between those de-grouping rules and the QAHC chargeable gains exemption which applies to overseas land and qualifying shares (see PARA 53).

PARA 36 applies where:

  • TCGA92/S179 applies in relation to an asset (‘the relevant asset’) other than an exempt asset that was acquired by one company (the transferee - or Company A) from another company (the transferor – or Company B); and
  • a chargeable gain/allowable loss would have accrued to the transferor (Company B) on a disposal of qualifying shares, but did not do so because the transferor (Company B) was a QAHC at the time of the disposal of those qualifying shares (see PARA 53); and
  • that gain or loss would have been adjusted under TCGA92/S179(3D) or (3E) by reference to the chargeable gain or allowable loss that would, in the absence of TCGA92/S179(3A), have accrued to the transferee (Company A) in relation to the relevant asset.

Where a chargeable gain/allowable loss would have accrued to the transferee (Company A), a chargeable gain/allowable loss in the same amount is treated as accruing to the QAHC transferor (Company B) outside its QAHC ring fence business at the time of the disposal of qualifying shares referred to in the second bullet point above (PARA 36(1)(b)).

If Company B is not a QAHC on the date that it acquires the relevant asset from Company A but, after the acquisition Company B then becomes a QAHC, PARA 36 may still apply.

Substantial shareholding exemption (SSE) may apply to the gain to the gain accruing to Company B as a result of PARA 36, but all required conditions must be met.

An asset is an exempt asset if no chargeable gain/allowable loss would accrue on the disposal of that asset due to the application of the QAHC exemption for chargeable gains in relation to overseas land and qualifying shares (FA22/SCH2/PARA53) (IFM40910+).

Example

Company B is a QAHC with a chargeable asset that is not within its QAHC ring fence business. It transfers the non-exempt asset to a member of the same gains group, Company A (which is also a subsidiary of company B), that is not a QAHC. Please note, there is no requirement for Company A to be a subsidiary of Company B in order for TCGA92/S179 and consequently PARA 36 to apply.

Company B subsequently sells its shares in Company A to a third party; these shares are qualifying shares (PARA 53(2)).

Since Company A (the transferee company) has left the group, TCGA92/S179 de-grouping rules are engaged. However, as Company A’s shares have been sold by another group company, S179(3A) applies and no chargeable gain/allowable loss accrues to Company A. Had the exemption in S179(3A) not applied, a gain of £200,000 would have accrued to Company A.

As S179(3A) has been engaged, S179(3D) passes the de-grouping charge to Company B (the transferor). This charge is based on the gain/loss arising from the disposal of Company A (the transferee) shares by Company B. The disposal of Company A’s shares by Company B gives rise to a gain of £300,000 but because Company B is a QAHC, and the Company A shares are qualifying shares, the gains exemption in PARA 53 applies.

In order to preserve the policy intention of the de-grouping rules, PARA 36 provides that a chargeable gain/allowable loss equal to the gain or loss that would otherwise have accrued (if the exemption of S179(3A) did not apply) to Company A (the transferee) now accrues to Company B (the QAHC). This chargeable gain accrues outside the QAHC ring fence business.

Therefore, a chargeable gain of £200,000 accrues to Company B (the QAHC) and is subject to the normal corporation tax rules, so that, for example it may be offset by any capital losses that arise outside the QAHC ring fence business.