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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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ETMD: transparent entities: taxation after transfer of part of a business or a merger: conditions within section 140K

CG45728 explained the double taxation problem that can arise where the transferor is opaque and the transferee is a transparent entity. TCGA 1992 Section 140K provides the solution and it can apply to situations where either section 140E or section 140A(1A) can apply.

In order for section 140K to apply the following conditions must be met.

  • In mergers involving section 140E or transfers of assets within section 140A(1A) the transferee has to be a transparent entity within the meaning of section 140L(1)(c). For the purposes of section 140K the transferee is referred to as company A; section 140K(1)(a).
  • A person, X, with an interest in company A, was or is also a shareholder or debenture holder of another company, company B; section 140K(1)(b).
  • X became entitled to an interest, or an increased interest, in company A in exchange for a disposal of shares in, or debentures of, company B on a merger to which section 140E applied or on a transfer to which section 140A(1A) applied; section 140K(1)(c).
  • A chargeable gain accrued to X on the disposal of shares in or debentures of company B; section 140K(1)(d).
  • In calculating the gain on the shares or debentures account was taken of the value of an asset of company B; section 140K(1)(e)), and
  • X makes a disposal of his interest in that asset; section 140K(1)(f).

Section 140K(3) defines an interest in company A as including

  • an interest in the assets of company A
  • shares in company A, and
  • debentures of company A.

The effect of section 140K is provided by subsection (2) and the example at CG45728 demonstrates how this is achieved. In statutory terms where there has been a disposal by X of an interest in an asset that was held by the transferee transparent entity the allowable cost under TCGA 1992 section 38(1)(a) is to be computed by reference to the value of the asset that was taken into account when computing the gain on the disposal of X’s shares or debentures in company B (the ‘opaque’ company which owned the asset before ownership passed to transparent company A, either by transfer or merger).