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HMRC internal manual

Business Leasing Manual

Sale of lessor companies and similar arrangements: election out of charge: transfers into and out of a ring fenced company - transactions before 23 March 2011

Section 398G

This guidance applies when the transfer falls before 23 March 2011. For transfers on or after 23 March 2011 see BLM80573.

Whereas section 398D prevents losses reducing the profits of the leasing trade in the hands of the lessor company, section 398G prevents profits of the lessor company being exported to other companies.

A lessor company could sidestep the restrictions imposed by the ring fence by transferring plant or machinery out of the company at a value other than market value as defined in the sale of lessor company provisions.

Section 398G ensures that a transfer of plant or machinery assets can not benefit from special rules giving tax neutrality - section 948 CTA 2010, or imposing a market value that is out of line with the approach taken in the sale of lessor company provisions - section 265 CAA 2001.

Example 1

A Ltd owns and leases out trains. It is sold to the loss-making Z Group and elects out of the charge. Once in the Z Group, it transfers its business to B Ltd, a fellow member of the Z Group.

The accounting value of the transferred trains is £10m - this reflects the market value of the trains. Their tax written down value is £1m. A sale of the trains at market value would create a balancing charge of £9m - broadly equivalent to the deferred profits of the business

The transfer falls within the special provisions at section 948 CTA 2010 so that, for tax purposes the assets are treated as transferred at written down value. No balancing charge would be calculated and the profits of the leasing business, including the deferred tax profits, would be transferred to B Ltd where the Z Group losses could be freely used so the profits escape taxation.

Section 398G prevents section 948 from applying whenever the ring fenced company is involved in a transfer of assets. The tax effect of the transfer is computed on the assumption that the assets are transferred at market value.

Example 2

A Ltd owns and leases out trains. It is sold to the Z Group and elects out of the charge.

It transfers its trade to Y Ltd, an unconnected party. The transfer is a succession to the trade of A Ltd and falls within the provisions of section 265 CAA2001. Regardless of the amount paid between the parties the tax consequences of the transfer are computed on the assumption that the transfer was at market value.

Section 398G ensures that ‘market value’ has the same meaning for the purposes of section 265 as it has in the sale of lessor company provisions.