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HMRC internal manual

Capital Gains Manual

ETMD: consequential amendments within TCGA 1992: - section 179 shares

Shares are a class of asset consequently a degrouping charge under TCGA 1992 section 179 can arise in the same terms as described at CG45738 above.

In relation to the ETMD shares can be transferred in two different ways, either as part of a transfer of business to which section 140A or C applies, or as part of a merger to which section 140E can apply.

An example of where section 140A or C could apply is where the G group consists of companies G, H, K, L, M and N and ten other subsidiaries. In year 1 G transfers the shares in company K to company H. In year 2 company G transfers part of its business, namely the shares in company H, to company W, a French resident company. The conditions within section 140A are met. Company H has left the G group taking with it assets that it acquired from another company when it was a member of a group, the shares in company K, consequently a degrouping charge could arise under section 179.

However, section 179(1AA)(a) will prevent this from happening. Under that section if shares are included in a transfer to which either section 140A or C will apply, and as a consequence that would have given rise to a degrouping charge under section 179 then the company which left the group taking with it the shares is treated as not having left the group.

Section 179(1AA)(b) provides for a stand in shoe provision if the transferee is a member of a group, group 2 and the company whose shares have been transferred becomes a member of that group. Then the group that the company left, group 1, and the group that it joined, group 2, will be treated as the same group. Therefore under section 179(1AA)(b) there is still the potential for section 179 to arise on a future event involving the shares in question.

To put this in terms of the example when company H leaves the G group, group 1, taking with it the shares in company K section 179(1AA)(a) prevents a degrouping charge arising at that time of the transfer within section 140A. Companies H and W form group 2. If say one year after the transfer, and so within six years of the original transfer from G to H, company H were to leave group 2 then there would be a chargeable occasion, namely a degrouping charge, within section 179. If company H did not remain resident within the UK at the time of the transfer then the charge could still arise on that company when it leaves the W group within section 10B, see CG42100+.

It could be that shares are transferred by of a merger to which section 140E would apply. Using the same example as above in year one company G transfers to company L the shares in company N. In year 2 company L is merged with company Q, a French resident company. At the time of the merger L ceases to exist so it is no longer a member of the G group. The shares in company N are included in the assets transferred to company Q and those two facts mean that a degrouping charge would arise under section 179. Section 179(1B)(b) prevents this from happening.

Under section 179(1B)(a) where assets are transferred to a transferee within section 140E then a company which has ceased to exist will not be treated as having left a group. In terms of the example group 1 would be the G group.

Section 179(1C) ensures that where section 179(1B) is in point then the potential for a degrouping charge can still arise dependent on future events. Section 179(1C)(a) provides that the company which ceases to exist and the transferee company are to be treated as the same entity. The transferee company being the company to which the assets are transferred and included in those assets there are assets which would have given rise to the degrouping charge at the time of the merger.

Section 179(1C)(b) provides that if the transferee is a member of a group, group 2, then a company that was a member of group 1 and as a consequence of the merger becomes a member of group 2 is to be treated as the same. That rule applies irrespective of the fact that the transferee is the principal company of the group 2.

In terms of the example what this means is that company L and company Q are treated as the same entity. If company Q is a member of a group then that will be group 2. If say two years after the merger company Q left group 2 then a degrouping charge would arise on company Q on the shares in company N that were originally transferred to company L from company G. Although company Q is not a UK resident company the assets transferred to it must remain within the charge to UK tax under section 10B, see CG42100+, otherwise section 140E could never have applied to the merger. Consequently the degrouping charge can be collected by way of section 10B.

Section 179(1D) provides that references to transferor and transferee within section 179(1B) and (1C) have the same meaning as those within section 140E(9).

Note: The exemption for substantial shareholdings with Schedule 7AC can have no impact where section 140A or E is in point. Schedule 7AC paragraph 6 provides that the exemptions conferred by the schedule do not apply where the no gain no loss rule applies and that is what happens when section 140A or E applies. Paragraph 39 of schedule 7AC provides for particular treatment in relation to the schedule where section 179(3) is in point and the asset involved is shares. However where section 140A or E is in point and either sections 179(1AA) or (1B) are also in point there is no degrouping event then section 179(3) has no application consequently paragraph 39 of Schedule 7AC does not apply.