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HMRC internal manual

Capital Gains Manual

The degrouping charge: mergers: overview


TCGA92/S181 provides a general exemption from the degrouping charge in TCGA92/S178 and TCGA92/S179, see CG45400+, in relation to certain mergers. There is no degrouping charge where both the following conditions are met.

  • As part of a merger (as specially defined) a company (`company A’) ceases to be a member of a group of companies (`the A group’) (TCGA92/S181 (1)(a) ).
  • The merger was carried out for bona fide commercial reasons and tax avoidance was not the main or one of the main purposes of the merger (TCGA92/S181 (1)(b)).

Put briefly, this rule stops degrouping charges being triggered when a group contributes a company to a joint venture company in return for a share in the joint venture company that corresponds to the value of the business that it has contributed. In such a situation degrouping charges could be triggered in respect of historic asset transfers or those that are required in order to facilitate the establishment of a merged business. There are certain requirements as to the nature of the holding in the joint venture company that are described in the following pages but here is a summary of the issues that commonly lead to uncertainty:

  • Whether there is a genuine long term joint enterprise? The exception could be used to mitigate tax if the joint venture is not a long term commercial investment. Hence the tax avoidance purpose test. HMRC recognises that commercial arrangements may feature “escape clauses”, for the parties and will consider the long term intentions of the parties at the outset. Assurances as to these may be required when considering an application for an opinion under CG45601 below.
  • What is meant by “long term”? Bearing in mind that the degrouping charge applies to transactions in the previous 6 years, HMRC would regard a merger intended to last that length of time as being long term.
  • Whether the rule must apply to all the parties involved? The rule applies independently to each party, see CG45602 below.
  • Does each party need to acquire an equal share in the merged enterprise? No, see final paragraph of CG45605 below.

The effect of cash contributions by a party. This may affect the application of the rule and is discussed at CG45606 below.