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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Targeted anti-gain buying rule - example

Group A owns all of the share capital of company B Ltd that in turn owns a business with substantial intangible property. The intangible property does not qualify for amortisation relief under FA02/SCH29 as it was held by B Ltd prior to 1 April 2002. If A sells the share capital in B Ltd it would realise a substantial gain covered by the substantial shareholding exemption. Company C Ltd wishes to buy the business of B Ltd but not B Ltd itself, as C Ltd wishes to obtain the amortisation relief made available when intangible property is acquired after 1 April 2002.

Group A sells its share capital in B Ltd to company X Ltd, which has substantial capital losses available. A has thus made a gain that is exempt under the substantial shareholdings rules. X Ltd then arranges for the sale of the business of B Ltd including the intangible property to C Ltd, hoping that its losses can be deducted from the gain arising.

This is clear example of gain buying that would not have been prevented by TCGA92/SCH7AA, which applied up to 5 December 2005. The second principle in the HMRC statement (see Appendix 8) has been contravened. X Ltd only becomes a participant in the scheme because it has surplus capital losses that it is willing to make available using TCGA92/S171A. The intended result is that the capital losses of X Ltd will be used to reduce the gain that arises when the trade of B Ltd is sold from Group A to C Ltd. There has clearly been a qualifying change of ownership as defined by TCGA92/S184C. A gain has arisen to company B on the disposal of a pre-change asset. The change in ownership has occurred in connection with arrangements the main purpose of which is to secure a tax advantage. TCGA92/S184B provides that the gain may not be franked by a loss.