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HMRC internal manual

Capital Gains Manual

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Substantial shareholdings exemption: the trading company/group/subgroup requirements - trading group and trading subgroup

TCGA92/SCH7AC/PARA21 & TCGA92/SCH7AC/PARA22

Paragraph 21 Schedule 7AC TCGA 1992 defines a ‘trading group’ for the purposes of the substantial shareholdings exemption regime. A ‘trading group’ is a group (CG53006 explains what is a group for the purposes of the substantial shareholdings legislation)

  • where one or more of whose members carries on ‘trading activities’ (CG53113), and
  • whose activities, taken together and disregarding intra-group activities, do not to a substantial extent include activities that are not trading activities.

Paragraph 21(5) refers explicitly to intra-group activities. It provides that for these purposes the activities of the members of a group are treated as one business so that activities are disregarded to the extent that they are between members of the group. The types of activities this affect include

  • holding shares in other group companies,
  • making loans to group members,
  • trading transactions between group members,
  • paying and receiving dividend or interest intra-group,
  • the leasing or letting of property or rights from one group member to another.

So, for example, where one group company lets a property to another Group Company, the letting activity would be disregarded for this purpose. However, this netting off approach does not extend to transactions with joint venture companies that are not members of the group. So, letting property to such a joint venture company would count as an activity of the lessor.

Paragraph 21 also explains what is meant by ‘trading activities’ for these purposes. These are activities carried on by a member of a group

  • in the course of, or for the purposes of, a trade (CG53113b) that is carried on by any member of the group;
  • for the purposes of a trade that any member of the group is preparing to carry on (CG53113c);
  • with a view to any member of the group acquiring or starting to carry on a trade (CG53113d);
  • with a view to any member of the group acquiring a significant interest in the share capital of a trading company, or the holding company of a trading group or subgroup (CG53113d) (subject to the restrictions outlined below).

There are two restrictions. First, the last two types of activity only count as trading activities if an acquisition is made, or a member of the group starts to carry on a trade, as soon as is reasonably practicable in the circumstances (CG53113e).

Second, for last type of activity the acquisition will only count as significant if

  • it is an acquisition of ordinary share capital, and
  • the company whose shares are to be acquired (Target) is not already be a member of the same group as the acquiring company (Acquirer), and the shares to be acquired would either
  • make Target a member of the same group as Acquirer, or
  • give Acquirer a qualifying shareholding in a joint venture company without making the two companies members of the same group.

Paragraph 22 Schedule 7AC TCGA 1992 provides corresponding definitions to identify part of a group as a ‘trading subgroup’ for the purposes of the substantial shareholdings exemption regime. Paragraph 22(5) ensures intra-subgroup activities are disregarded in the same way as intra-group activities when determining whether a subgroup is a trading subgroup. However, intra-group activities between a member of the subgroup and another group company that is not in the subgroup are not disregarded in considering the status of the subgroup.

Note that there are special rules for groups and subgroups that have a ‘qualifying shareholding’ in a ‘joint venture company’ - see CG53114. There is guidance on how you might measure the extent of a group’s activities, and what we understand to be ‘substantial in this context, at CG53116. The same definitions of trading group and trading activities were brought into the taper relief regime by Finance Act 2002 for times from 17 April 2002.