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HMRC internal manual

Capital Gains Manual

Administration: losses: targeted rules to prevent the contrived creation of capital losses by companies - example 3

Y plc is the principal company of a property group that includes a subsidiary company XLtd. X Ltd owns a property in the centre of London with a base cost of £1bn. The propertywas previously acquired from a fellow group company at no gain/no loss (TCGA92/S171) whenthe market value of the property stood at £900m. X Ltd issues shares to an unconnectedparty, B Ltd, to the extent that B Ltd holds 30% of the issued share capital of X Ltd andso X Ltd is no longer a member of the Y plc group. These new shares have very restrictedrights compared to those already in issue.

In the absence of the FA 2006 amendments to TCGA92/S8 (TCGA92/S16A with effect from 6December 2006 – see CG40241) the fact that X Ltd is no longer part of the groupheaded by Y plc triggers the degrouping provisions, and a capital loss is realised,reflecting the previous fall in property value of £100m.

This is an example of artificial degrouping by issuing shares in a subsidiary company to athird party. In this example, although Y plc has suffered from a real fall in the value ofits subsidiary, X Ltd, as a result of changes in the property value, it has not made areal commercial disposal of the subsidiary to realise that loss. The presence of only veryrestricted rights attached to the new shares indicates that Y plc has no intention ofmaking any material disposal of its economic interest in the property. Following theenactment of the FA 2006 amendments to TCGA92/S8 (TCGA92/S16A with effect from 6 December2006 – see CG40241), any loss accruing to Y plc in pursuance of arrangements will notbe an allowable loss.

The issue of shares with very restricted rights to a third party is an arrangement thatthe new legislation would affect because this transaction was undertaken primarily tosecure a tax advantage, being the recognition of a capital loss through the operation ofthe ‘de- grouping’ provisions. The FA 2006 amendments to TCGA92/S8 (TCGA92/S16Awith effect from 6 December 2006 – see CG40241) provide that this loss arises indisqualifying circumstances and is not therefore an allowable capital loss.

If, however, in the above example B Ltd genuinely wished to enter into a joint ventureinvolving the property, then a different outcome can be expected. It would have subscribedfor shares that had rights comparable to those in issue, so that it acquired acorresponding share of the economic value of X Ltd. In those circumstances, securing a taxadvantage is unlikely to have been a main purpose of the transaction.