The degrouping charge: when a charge is triggered, special rules
The general rule in TCGA92/S179(1) that leads to a degrouping charge being triggered is modified in the following circumstances, discussed below.
Special rule 1: the sub-group exception TCGA92/S179(2)
Where the asset transfer takes place within a sub-group and both company A and company B leave the group on a disposal of that sub-group then no degrouping charge will be triggered. There is detailed guidance on this exception to the charge at CG45435.
Special rule 2: Company takeovers TCGA92/S179 (5) - (8)
The degrouping charge includes a special rule for company takeovers in TCGA92/S179 (5)-(8). The starting point is the general rule in TCGA92/S170 (10): if at any time the principal company of a group becomes a member of another group, the first group and the other group are regarded as the same. But this does not mean that every member of the target group necessarily becomes a member of the new enlarged group, it is possible for a company in the acquired group to fail to meet the requirement to be a 51 per cent subsidiary of the principal company of the acquiring group, TCHA92/S170(3)(b). See CG45180.
This special rule ensures that there is no immediate degrouping charge if company A leaves a group in these circumstances. However, a degrouping charge will be triggered if subsequently company A ceases to be both
- a 75 per cent subsidiary, and
- an effective 51 per cent subsidiary
of a company that is a member of the acquiring group, provided that company A, or another company in the same group as company A, owns (otherwise than as trading stock) the asset or another asset against which a chargeable gain on the first asset has been rolled over.
Note that this rule was amended by Finance Act 2011 so that where a degrouping charge arises because a company ceases to meet the relevant conditions on or after 19 July 2011 because of a disposal of shares then, as with the general degrouping rule, the gain or loss arising from the deemed disposal of the asset will result in an adjustment to the consideration for the disposal of the shares, TCGA92/S179(7A) and (7B). The opportunity was also taken to align the language of TCGA92/S179(5) to (8) with that of the section generally.
This example illustrates the deferred degrouping charge which applies where a subsidiary ceases to be a member of a group on a takeover of its principal company by another company.
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.
At Stage 1 there is a capital gains group headed by principal company P, comprising P, Q, R and S. The principal company P has a 56.25 per cent interest in the profits and assets of R and S, so R and S are both effective 51 per cent subsidiaries of P.
At Stage 2 principal company P is taken over by W which acquires only a 75 per cent interest in P. Companies R and S are not members of the group headed by W. Company W has only a 42.19 per cent interest in the profits and assets of R and S.
If, within the six years prior to W’s takeover of P, R had acquired an asset from P which R still owns at the time of the takeover, then without special provision there would be a degrouping charge. The special rule means this is not triggered. However, a degrouping charge will be triggered if, in the period of six years following R’s acquisition of the asset from P, R ceases (at `the relevant time’) to be a 75 per cent subsidiary of a company in the W group, or ceases to be an effective 51 per cent subsidiary of a company in the W group. Say if, three years after Stage 2, Q sells all its shares in R to an unconnected third party.
Special rule 3: commencement of winding-up, TCGA92/S170 (11)
The commencement of the winding-up of a company does not break group relationships for capital gains purposes. This is the effect of TCGA92/S170 (11) which provides that the passing of a resolution or the making of an order, or any other act, for the winding-up of a member of a group of companies is not regarded as the occasion of that or any other company ceasing to be a member of the group, see also CG45191. The rule in TCGA92/S170 (11) applies only in relation to the commencement of the process of liquidation. It does not have any relevance to sales or distributions of shares by the liquidator in the course of winding-up.
Special rule 4: the “liquidation let-out”
The degrouping charge does not apply where a company ceases to be a member of a group in consequence of another member of the group ceasing to exist. This exclusion applies only where a parent company ceases to be a member of a group on the occasion of its only subsidiary ceasing to exist on dissolution (or all its subsidiaries ceasing to exist simultaneously on dissolution).
Special rule 5: the two company group practice
HMRC accepts that no degrouping charge will be triggered on assets transferred to the parent of a two company group which disposes of its single subsidiary. This undertaking has been publicised by the Consultative Committee of Accountancy Bodies in Technical Release 386 dated 31 March 1980 which states
`We should be grateful for confirmation that the Revenue will not seek to apply Section 278 ICTA1970 (company leaving a group) to assets transferred to a holding company of a group consisting of that company and one subsidiary when the subsidiary leaves the group.
The Revenue confirmed that they would not normally seek to apply Section 278, except where the parent company emigrated, thereby causing the group to break up.’
ICTA70/S278 was an earlier version of TCGA92/S179.
The caveat “normally” applied to certain emigration cases and ceased to be relevant following the change to the group definition from 1 April 2000.
Special rule 6: exclusions: mergers and demergers
There are provisions which prevent the degrouping charge being triggered by certain mergers and demergers, see CG45600+ and CG45620.
Special rule 7: Investment Trusts and Venture Capital Trusts, TCGA92/S179 (2C) & (2D)
There is an exception from the degrouping charge for companies which leave a group owning assets to which either TCGA92/S101A (investment trusts) or TCGA92/S101C (Venture Capital Trusts) has applied. Those sections also impose a deemed market value disposal and reacquisition of the asset immediately after its transfer at no gain/no loss under TCGA92/S171(1). See CTM47000 onwards for more details on Section 101A and CG41520+ for Section 101C.
Special rule 8: rolled over gains, TCGA92/S179(3)(b)
Where a gain on one asset is rolled over against another asset by one or more business asset roll-over relief claims under TCGA92/S152 or TCGA92/S153 with the result that:
- the chargeable gain on the first asset is reduced
- and as a result an amount is deducted from the allowable expenditure on the second asset
then a degrouping charge will arise in respect of the transfer of the first asset as and when a company leaves the group owning the second (or successive) asset. TCGA92/S179(3)(b) and TCGA92/S179(10(b).
In year 1, company G transfers an asset (asset 1) to company H in the same group. Company H disposes of the asset to a third party in year 3, realising a gain. Company H acquires another asset (asset 2) and claims business asset roll-over relief against the acquisition of asset 2 so that on a future disposal the allowable capital gains cost of asset 2 would be reduced by the amount of the gain on asset 1.
In year 4, company H, still owning asset 2, is sold by the group. The conditions for a degrouping charge in respect of asset 1 are satisfied because the gain on that asset has been rolled over into an asset that is still owned by a company that leaves the group.
Special rule 9: Assets derived from other assets, TCGA92/S179(10)(c)
There is a special rule dealing with changes in the nature of an asset in TCGA92/S179(10)(c). An asset acquired by company A is treated as the same as an asset owned by that company (or an associated company) if the value of the second asset derives wholly or partly from the first asset. This rule specifies in particular the case where a company acquires a lease at no gain/no loss, and subsequently acquires the freehold reversion.
In year 1, company K grants or assigns a lease to company L in the same group. Company L acquires the freehold reversion in year 4 and leaves the group in year 5. The main conditions for a degrouping charge are satisfied since the freehold held by L when it leaves the group is treated as the same asset as the lease acquired from company K.
Special rule 10: European Mergers
There are special rules to take count of the TCGA provisions dealing with certain mergers within the European Union at TCGA92/S179(1AA) to (1D). Guidance can be found at CG45738 and CG45739.
Note that it was possible for a group to elect to apply the changes to degrouping charge rules made in Finance Act 2011 from 1 April 2011. Whenever the above guidance refers to 19 July 2011 it should be taken as referring to 1 April 2011 for a company in a group that has made such an election.