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HMRC internal manual

Capital Gains Manual

The degrouping charge: how and when a gain or loss accrues, outline

The mechanism by which a gain or loss accrues as a result of a degrouping charge changed significantly where a charge is triggered by a company leaving a group on or after 19 July 2011.

The changes brought about by Finance Act 2011 mean that in many cases a degrouping charge will not bring about a separate gain or loss resulting from the deemed disposal and acquisition. Instead the amount of that gain or loss will be added to or subtracted from the consideration received by the group company that makes the disposal of shares that led to company A leaving the group. Because a company will not always leave a group as a result of an actual disposal of shares (there may be an issue of new shares, or a change in the rights in existing shares) the mechanism whereby a degrouping charge results in a gain or loss accruing directly to company A is preserved.

The changes are designed to align the tax and commercial consequences of disposing of a group company, in particular improving the interaction of the degrouping charge with the Substantial Shareholding Exemption.

Broadly speaking, a degrouping charge triggered in a company that leaves a group on a disposal of shares that qualifies for the Substantial Share Exemption will not lead to a tax liability. This will be the case even where the degrouping charge is in respect of an asset held by a subsidiary of the company whose shares are disposed of. A consequence is that the purchaser will benefit from the uplift in capital gains base costs resulting from the deemed disposal and reacquisition at market value.

These changes were introduced to make the Substantial Shareholding Exemption more effective for groups that make commercial disposals of trading companies. Where there is no such disposal, for example where the share disposal is to a connected party in order to avoid tax on a sale of an asset (because of the uplift in base cost) then the anti-avoidance rule in TCGA92/Sch7AC/para5 may apply so that the gain on shares will not be exempt. See CG53175.

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.