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HMRC internal manual

Capital Gains Manual

The degrouping charge: mergers: cash contributions

The contribution of cash (or other additional funds such as investments) to a merged enterprise along with a business can affect the operation of the rule.

  • Funds to meet the short term working capital requirements of the merged business are regarded as part and parcel of the business and do not affect the operation of the relief.
  • Funds to meet the longer term requirements, such as where one party, X, requires Y to make a significant contribution of funds because it is concerned about the longer term capital requirements of part of the business being contributed by Y, would be regarded as being contributed in addition to the business being put in by Y. That may mean that the value of the business being contributed by Y is not substantially the same as the value of the share in the joint venture being acquired by Y and so the relief may not apply to Y. However, that would not affect the question of whether the rule may apply to X.
  • Funds that are not introduced to meet the needs of the joint venture but that may be distributed will affect the operation of the rule. Taking the example above, if the funds contributed by Y were then paid up to X as a dividend then, in effect, X would be receiving consideration for part of the business it contributed to the joint venture for the purposes of the condition in TCGA92/S181(4)(c).