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HMRC internal manual

Corporate Finance Manual

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HM Revenue & Customs
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Derivative contracts: group continuity: degrouping charge

Company leaves the group following an intra-group transfer

A company may seek to avoid tax by transferring an in-the-money derivative within the group, and then selling the transferee company. The group therefore realises the profit inherent in the derivative, but for tax purposes this appears as a chargeable gain, which is likely to be covered by the substantial shareholding exemption or by allowable losses under TCGA92.

CTA09/S630 (originally introduced by FA 2005) prevents exploitations of the group neutrality rules in the way. It applies where a company ceases to be a member of a group on or after 16 March 2005.

Like CTA09/S609 (CFM53100), CTA09/S630 treats the company as disposing of the derivative contract at fair value, and immediately reacquiring it for the same consideration, at the time at which it leaves the group. But there are two important differences from CTA09/S609.

  • The provision applies only if the company acquired the contract as the result of a transaction or transactions to which CTA09/S625 applies, and then leaves the group during the ‘relevant 6 year period’. Where an intra-group transfer occurred as the result of a direct novation or other disposal from transferor or transferee, the ‘relevant 6 year period’ starts from the date of that transaction. Where the transfer is effected by a series of transactions, it runs from the date of the last of those transactions.
  • It applies only if the result of the deemed disposal at fair value is a credit. A company cannot use CTA09/S630 to crystallise a tax loss.

There is one exception to the rule that CTA09/S630 cannot give rise to a debit. The corresponding ‘degrouping’ provision for loan relationships in CTA09/PT5/CH4 (CFM34110) may result in a credit being brought into charge, representing profit on a creditor loan relationship that has been deferred as a result of the loan relationships group neutrality rule. But if the loan relationship is hedged by a derivative contract, the economic profit on the loan relationship asset will be offset by a loss on the derivative. So, where there is a hedging relationship between a derivative contract and a creditor loan relationship of the company, and a credit is brought into account on the loan relationship under CTA09/PT5/CH4, a debit may be brought into account on the derivative under CTA09/S630.

CTA09/S631 provides that if the company ceases to be a member of a group only because of an exempt distribution under CTA10/PT23/Ch 5, there is no deemed disposal of the derivative contract. But if a chargeable payment within CTA10/S1088 is made within 5 years, CTA09/S632 applies. This reinstates the degrouping charge that would have arisen when the company left the group, but it is treated as arising immediately before the chargeable payment is made.