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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: 51% ownership - modification of corporation tax rules

For the purpose of determining one company’s beneficial entitlement to the profits and assets of another company, the capital gains group definition applies the Corporation Tax rules in CTA10 Part 5, Chapter 6. The provision which allows indirect beneficial entitlement to be established through intermediate companies is at CTA10/S167.

The rules in CTA10 are subject to three modifications which apply only for the purposes of the capital gains group rules. These concern

  • bank lending,
  • arrangements whereby an entitlement to profits or assets may be reduced,
  • options.

Bank lending

Under CTA10/S159(1)(b), a person who is a loan creditor of a company in respect of a loan which is not a normal commercial loan (CTA10/S162) is an equity holder of the company. The effect of the modification introduced for the purposes of the capital gains group definition is that a bank is not treated as a loan creditor of a company (and accordingly is not an equity holder) in respect of loans made to the company in the ordinary course of that business. This is the result of TCGA92/S170(8)(a).

Arrangements to reduce entitlements

The CTA rules restrict the percentage entitlement to profits or assets if there are arrangements under which the entitlement could be reduced at a later date. It is arguable that an agreement to sell a company constitutes “arrangements” with the result that a company might leave the group before the usual capital gains disposal. So, for the purposes of the capital gains groups 51% test, this aspect of the CTA10 rules is disregarded, TCGA92/S170(8)(b).

Options

CTA10/S173 and CTA10/S174 set out rules in respect of options over shares or securities. These are also to be disregarded as a result of TCGA92/S170(8)(b).