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HMRC internal manual

Business Leasing Manual

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HM Revenue & Customs
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Sale of lessor companies and similar arrangements: election out of charge: transfers into and out of a ring fenced company - transactions on or after 23 March 2011

Section 398G

This guidance applies when the transfer falls on or after 23 March 2011. For transfers before 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 all transfer into or out of the company of plant or machinery assets can not benefit from special rules giving tax neutrality, and requires all transfers out of the company to be treated, for tax purposes, as taking place at the higher of the Part 2 CAA 2001 disposal value and the ascribed value (see s437A CTA2010).

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 disposal value that is brought into account on the transfer is the higher of:

  • The disposal value that would be brought into account on the basis of the actual sale proceeds; and
  • The ascribed value.

Example 2

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

The leases on two of the trains are terminated and A Ltd sells one to B Ltd a member of the Z group and one to Y Ltd, an unconnected party. The transfers are not part of a succession to a trade and section 498 is not in point. The disposal value brought into account in the case of both transfers is the higher of:

  • The disposal value that would be brought into account on the basis of the actual sale proceeds; and
  • The ascribed value.