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HMRC internal manual

Corporate Finance Manual

HM Revenue & Customs
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Loan relationships: group continuity: degrouping

Transferee company leaving group on or after 16 March 2005

Where a loan relationship is transferred between companies in a group, the operation of the group continuity rules means that the value at which the transferee is treated, for tax purposes, as having acquired the asset or liability is not necessarily the same as the accounts value.

Suppose company A Ltd has a loan relationship asset which is accounted for at cost of £1m. In year ended 31 December 2003, it transfers the asset to B Ltd, a 100% subsidiary of A Ltd, for its then fair value of £1.4m. B Ltd is a special purpose vehicle, which has no assets apart from the loan relationship. It issues shares of £1.4m in consideration of the transfer.

In year ended 31 December 2004, the fair value of the loan relationship held by B is £1.6m. At this point, A Ltd sells the shares in B Ltd to an unconnected party for £1.6m. It realises a capital gain of £200,000 on the share disposal (which will be reduced by indexation, and may be covered by capital losses). But A Ltd is not taxed at all on the growth in value of the asset, from £1m to £1.4m, prior to the intra-group transfer to B Ltd.

This is because CTA09/S340 ignored the credit of £400,000 in A Ltd’s accounts when the transfer occurred. Instead, B Ltd is treated as having acquired the asset for £1m.

In order to counter avoidance of this sort, a ‘degrouping charge’ applies where a company ceases to be a member of a group on or after 16 March 2005 - CTA09/S344.

Degrouping charge: effect

CTA09/S344 applies to the transfer of either a loan relationship asset (a creditor loan relationship) or a liability (a debtor loan relationship) if

  • there has been an intra-group transfer of the loan relationship within the group continuity rule (that is, a direct transfer within CTA09/S336(2), or an indirect transfer within S336(3), and including cases where ‘one company replaces another’ to become party to a loan relationship with rights and obligations equivalent to the first), and
  • the transferee company ceases to be a member of the group within the ‘relevant six year period’.

Where the loan relationship is transferred directly, the six years starts from the date of the transfer. If it is transferred indirectly, the clock starts running when the last of the series of transactions takes place.

Where S344 does apply, its effect is to deem there to have been a disposal and reacquisition of the asset or liability for its fair value immediately before the transferee company leaves the group. Thus, in the example above, had B Ltd left the group on or after 16 March 2005, it would be deemed to have disposed of, and immediately reacquired, the loan relationship for its fair value of £1.6m, and would therefore be required to bring a loan relationships credit of £600,000 into account.

This rule will only apply where one of two conditions is met - see CFM34120.

There is an exemption where a company ceases to be a member of a group by reason only of an exempt distribution - see CFM34130.