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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Capital gains group definition: what is a group?

TCGA92/S170(9) and (3)

A company, referred to as the `principal company of the group’, and all its 75 per cent subsidiaries form a capital gains group, together with any 75 per cent subsidiaries of those subsidiaries, and so on. This 75 per cent subsidiary requirement is in terms of beneficial ownership of ordinary share capital. In addition, a subsidiary can only be a group member if it is also an `effective 51 per cent subsidiary’ of the principal company. This means that the principal company must have a beneficial entitlement (either direct or indirect) to more than 50 per cent of the subsidiary’s profits and assets.

The 51% requirement was introduced in 1989, before then it was possible for a company to be a member of a group even though the principal company’s interest in it had been diluted through ownership layers.

 

EXAMPLE 1

In this example, each of A, B and C has a 75 per cent interest in the ordinary share capital, profits and assets of its directly held subsidiary.

A

75%

B

75%

C

75%

D

The 75 per cent subsidiary requirement in terms of ordinary share capital operates on a `cascade basis’, that is, it has to be satisfied in relation to each tier considered separately. Since B is a 75 per cent subsidiary of A, C is a 75 per cent subsidiary of B, and D is a 75 per cent subsidiary of C, all these companies satisfy the ordinary share capital requirement in relation to principal company A. This requirement is met even though A’s indirect interests in the ordinary share capital of C and D are only 56.25 per cent and 42.19 per cent respectively.

The effective 51 per cent subsidiary requirement in terms of profits and assets operates `top to bottom’. The principal company of the group is A, and only companies satisfying the condition that A has a 50 per cent plus interest in their profits and assets are members of A’s group. A has a 75 per cent direct interest in the profits and assets of B, and A has a 56.25 per cent indirect interest in the profits and assets of C, so A, B and C are in the same group. A has only a 42.19 per cent indirect interest in the profits and assets of D, so D is not a member of A’s group.

75% subsidiary

The definition of 75% subsidiary is to be found in CTA10/S1145(3): company Y is the 75% subsidiary of company X if company X beneficially owns, directly or indirectly, 75 per cent or more of the ordinary share capital of company Y. Ordinary share capital is defined by CTA10/S1119 as meaning all of a company’s issued share capital, however named, but excluding capital whose holders have a right to fixed-rate dividends but no other right to share in the company’s profits.

Ordinary share capital

TCGA92/S170 (2)(c) treats any share capital of a registered industrial and provident society as ordinary share capital for the purposes of the capital gains group rules. The question of whether a particular entity has ordinary share capital may be important when considering capital gains groups. A company that has no ordinary share capital cannot be a subsidiary. The question arises most often when considering entities created under foreign law. There is also the possibility that a foreign entity may be considered to be transparent for UK tax purposes. Of course, a company that has no ordinary share capital may be the principal company of a group.

Some overseas corporate codes allow the issue of shares of no par value. Shares (other than fixed-rate preference shares) which have no par value form part of a company’s ordinary share capital for the purposes of CTA10/S1119 so far as amounts subscribed fall within `stated capital’ in relation to the shares. Where no par value shares are issued under foreign law, the local statute may require the amount subscribed to be allocated to a stated capital account. In some cases an excess of the subscribed amount will go to a `surplus capital’ or premium account; in others it is possible that there is no ordinary share capital.

The CT Structures Team in CT & VAT has technical responsibility for CTA10/S1119, The text of their note setting out HMRC’s guidance on the interpretation of “ordinary share capital” can be found at appendix 11.

Open Ended Investment Companies

An Open Ended Investment Company (“OEIC”, a company formed under the Financial Services Management Act 2000) would be unlikely to have subsidiaries and its shares would not be regarded as ordinary share capital for the reason given at CTM48435. Because of changes to the OEIC regime, these companies are specifically excluded from CG group membership with respect to disposals on or after 1 April 2006.

  • S832(2A) ICTA 1988 provides that shares in an OEIC shall not be ordinary share capital (carried over to CTA10, see Schedule 2, Part 1 of that Act),
  • S170(4A) TCGA provides that an OEIC shall not be the principal member of a CG group.

(Authorised Investment Funds (Tax) Regulations 2006, regulations 94(5) and 107 modify the primary legislation for these purposes).

51% ownership

The second requirement restricts group membership to companies in which the principal company of the group has a 50 per cent plus interest in terms of both profits and assets.

TCGA92/S170 (7) & TCGA92/S170 (8)

A company is an effective 51 per cent subsidiary of another if it satisfies the conditions in TCGA92/S170 (7) and (8). A company, `the subsidiary’, is an effective 51 per cent subsidiary of another company, `the parent’, at any time if and only if

  • the parent is beneficially entitled to more than 50 per cent of any profits available for distribution to equity holders of the subsidiary, and
  • the parent would be beneficially entitled to more than 50 per cent of any assets of the subsidiary available for distribution to its equity holders on a winding-up.

For this purpose a parent’s interest in its subsidiary’s profits and assets is determined by the rules in CTA10 Part 5, Chapter 6. The chapter contains exhaustive rules to determine the proportion of the ordinary share capital of one company held directly or indirectly by another company. Where a company owns a fraction (using that term to include unity) of the ordinary share capital of a second company, and the second company owns a fraction of the ordinary share capital of a third company, then the first company owns that fraction of the ordinary share capital of the third company which results from multiplying the two fractions together. If the relationship of the first company to say a fourth company is under consideration, the first company may own one fraction directly, another through one or more intermediaries, and another fraction through a different chain of shareholdings. In such a case, you should aggregate the various fractions to arrive, without duplication, at the total fraction of the ordinary share capital of the fourth company held by the first.

The CTA10 rules are modified in certain situations, see CG45116.

EXAMPLE 2

In this example the numbers showing the interest which one company has in another company give firstly the direct beneficial ownership of ordinary share capital, and secondly the direct beneficial entitlement to both profits and assets. Accordingly `75:75’ means that the first company beneficially owns 75 per cent of the ordinary share capital of the second company, and is beneficially entitled to 75 per cent of the second company’s profits and assets.

    A    
         
100:100 :       : 100:100
  B   C  
50:50 :       : 25:25
    D    
        75:75
    E    

All of the companies A, B, C, D and E are members of the same group.

Each of A to E satisfies the group membership requirement in terms of ordinary share capital. A has direct 75 per cent subsidiaries B and C, and an indirect 75 per cent subsidiary D. Company E is a direct 75 per cent subsidiary of A’s indirect 75 per cent subsidiary D.

All of A to E satisfies the group membership requirement in terms of profits and assets. A’s direct and indirect beneficial entitlements to profits and assets give it 100 per cent interests in B and C; a 75 per cent interest in D; and a 56.25 per cent interest in E. Each of B, C, D and E is accordingly an effective 51 per cent subsidiary of A.