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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: prevention of multiple group membership

TCGA92/S170(4), (5) & (6)

It is not uncommon to find that a company will satisfy the 75 per cent subsidiary requirement in terms of ordinary share capital but will not be an effective 51% subsidiary of a principal company. It is possible for such a company to be the principal company of a group but there are additional rules to consider.

The general rule is that a company cannot be the principal company of a group if it is itself a 75 per cent subsidiary of another company, TCGA92/S170(4).

There is then an exception to this rule in TCGA92/S170(5) dealing with the case where

  • a company, `the subsidiary’, is a 75 per cent subsidiary of another company but
  • the two companies are prevented from being members of the same group because the subsidiary is not an effective 51% subsidiary of the group’s principal company.

The effect of TCGA92/S170(5) is that where a company (company Y) is a 75 per cent subsidiary of another company (company X), but X and Y are prevented from being members of the same group because Y is not an effective 51 per cent subsidiary of the principal company of X’s group, then Y may be the principal company of another group.

This exception works “from the top down”. That is, if Y also had a 100% subsidiary Z then both Y and Z would fail the 51% test but the exception would result in only Y being treated as a principal company.

EXAMPLE

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 `80:80’ means that the first company beneficially owns 80 per cent of the ordinary share capital of the second company, and is beneficially entitled to 80 per cent of the second company’s profits and assets.

A  
   
  :80:80
B  
  :80:80
C  
  :80:80
D  
  :80:80
E  
  :100:100
F  

B, C, D, E and F each satisfy the group membership requirement in terms of ordinary share capital. A has a 75 per cent subsidiary B, which has a 75 per cent subsidiary C, and so on for all companies down as far as F.

In terms of direct or indirect beneficial entitlement to profits and assets, A has an 80 per cent interest in B; a 64 per cent interest in C; a 51.2 per cent interest in D; and 40.96 per cent interests in each of E and F. This means that B, C and D are effective 51 per cent subsidiaries of A, but E and F are not. A is therefore the principal company of a group which also includes B, C and D.

E is the principal company of a separate capital gains group comprising E and F. Although E is itself a 75 per cent subsidiary of another company D, E is not on that account prevented from being the principal company of a group. This is because E is not an effective 51 per cent subsidiary of A which is the principal company of D’s group, and so cannot be in the same group as D. E is treated as the principal company of the separate group in preference to F (assuming that F itself has one or more subsidiaries) since treating E as a principal company makes F a member of E’s group.

In this example there are two capital gains groups. Companies A, B, C and D form a group headed by principal company A. Companies E and F form a separate group headed by principal company E.

Tiebreaker rules

There is a further general rule in TCGA92/S170 (6) that a company cannot be a member of more than one group. Where, apart from this rule, a company would be a member of two or more groups, there are a series of “tiebreaker” tests to determine of which group, if any, the company is a member. These rules are described at CG45125.