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HMRC internal manual

Capital Gains Manual

Capital gains groups: historical overview

1965 - Introduction of CGT, applying to companies
1968 - Depreciatory transactions & degrouping
1975 - “Bed & breakfasting” rule introduced
1977 - Value shifting
1989 - Tightening of group definition, value shifting for groups
1993 - Preventing loss buying
1995 - Degrouping change
1998 - Preventing gain buying
2000- Worldwide groups & 171A elections
2002 - The Substantial Shareholdings Exemption
2006 (effective from December 2005) - Targeted Anti-Avoidance Rules for allowable losses
2009 - New provision for transferring gains & losses within groups
2011 - Package of simplification measures

As mentioned in CG45000, the capital gains rules that affect groups of companies have changed considerably over the years. This “potted history” outlines the main changes:

1965 - Introduction of CGT, applying to companies

Recognition of a group as an economic entity with no triggering of gains and losses on transfers within the group. Also, the share exchange provisions mean that gains and losses may not be triggered immediately when shares (or securities) are exchanged for others.

  • The group definition, TCGA92/S170, CG45100+; nil gain/nil loss disposals within the group, TCGA92/S171, CG45300+; the share reorganisation rules, TCGA92/S127, S135 etc…, CG51700+.

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1968 - Depreciatory transactions & degrouping

Dealing with the “mechanical” effects of intra-group transactions which had been used for avoidance.

  • Depreciatory transactions, TCGA92/S176, (extended to non-group situations by TCGA92/S177), CG46500+; the degrouping charge, TCGA92/S179, CG45400+.

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1975 - “Bed & breakfasting” rule introduced

To address companies disposing of and then reacquiring assets standing at a loss to create a tax loss to set against realised gains on other assets when no commercial intention to dispose of loss assets at the time.

  • Disposal proceeds of securities “matched” with cost of securities acquired within a certain period, TCGA92/S106, CG51611. Abolished in 2006.

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1977 - Value shifting

To deal with avoidance schemes that either reduced gains or created losses. Policy objective: anti-avoidance but no double charge for group transactions. As introduced, did not apply to most value movements within groups.

  • A “mechanical” value shifting rule that did not apply following many intra-group transaction, TCGA92/S30, CG13260+.

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1989 - Tightening of group definition, value shifting for groups

To prevent the possibility of a company being a member of more than one group and to ensure that was economically controlled by the group; measures to counter value shifting avoidance used by groups.

  • Rule to prevent groups within groups, TCGA92/S170(4), CG45020-CG45125; the effective 51% subsidiary rule, TCGAp9/S170(3)(b), CG45110; value shifting applied to group transactions in restricted circumstances (S31-34), CG46800+.

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1993 - Preventing loss buying

To restrict the use of capital losses of companies joining a group, especially for companies bought just for their tax losses.

  • Mechanical restrictions on use of losses of companies that join a group, whether realised or not, TCGA92/S177A and Schedule 7A, CG47520+. Extensively amended in 2011.

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1995 - Degrouping change

To counter exploitation of the associated companies exception.

  • Rule to reinstate a degrouping charge where TCGA92/179(2) has applied on a sale but companies remain under common control, TCGA92/S179(2A), CG45445.

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1998 - Preventing gain buying

To restrict use of capital losses when a company joins a group having realised a gain.

  • Mechanical restrictions on use of losses of group against realised gains of company joining, TCGA92/S177B and Schedule 7AA. Abolished in 2006, CG48200+.

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2000- Worldwide groups & 171A elections

To allow non UK resident companies to be members of a capital gains group and to allow certain assets to be transferred at no gain/no loss to of from non-residents. To reduce administrative burdens by allowing deemed transfer of assets by election.

  • Removal of the UK residence restriction, CG45110 and introduction of a deemed transfer by election following a disposal made outside a group, TCGA92/S171A), CG45355+.

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2002 - The Substantial Shareholdings Exemption

To assist international competitiveness by making certain share disposals exempt from corporation tax on chargeable gains.

  • Exemption of gains arising on disposals of certain shareholdings in trading companies and trading groups, TCGA92/S192A and Schedule 7AC, CG53000+.

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2006 (effective from December 2005) - Targeted Anti-Avoidance Rules for allowable losses

To introduce a package of three purpose based rules to prevent avoidance involving allowable losses.

  • “TAAR1” to prevent artificial creation of capital losses, TCGA92/S16A, CG40240+.
  • “TAAR2” to prevent loss and gain buying, TCGA92/S184A-F, CG47020+ and CG47320+.
  • “TAAR3” to prevent allowable losses being used to gain an income advantage, TCGA92/S184G-I, CG44100+.

At the same time the bed & breakfasting rule (TCGA92/S106) and the existing gain buying rule (TCGA92/S177B) were abolished. The loss buying rules were retained for their mechanical “streaming” effect.

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2009 - New provision for transferring gains & losses within groups

Extending the range of gains and losses that can be transferred by election and simplifying the procedure.

  • Election can be made in respect of most gains & losses that arise, effect is simple transfer of gain or loss rather than a deemed transfer, TCGA92/S171A-C, CG45356.

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2011 - Package of simplification measures

A package of measures to improve the way the rules that affect groups operate, introduced after extensive consultation.

  • Degrouping - changing the way a degrouping charge accrues where a company leaves a group on a disposal of shares, TCGA92/S179, CG45420; allowing for a claim to reduce a charge where the gains are reflected elsewhere, S179ZA, CG45430; abolition of the separate rule for transferring degrouping charges and losses, S179A, CG45455.
  • Loss buying - Schedule 7A simplified to provide a simple “streaming” function, now that tax driven transactions covered elsewhere, restricted losses no longer confined to use in continuing trading activities, CG47400+.
  • Value shifting - simpler purpose based rule to apply to disposals of shares by a company, CG48500+.