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HMRC internal manual

International Manual

Reliefs against Controlled Foreign Companies' tax: Relief for chargeable gains

Conditions for relief - chargeable gains ICTA88/SCH26/PARA3(1) and (7)

Conditions for obtaining relief for a Chapter IV liability against a chargeable gain arising from a disposal of shares in the controlled foreign company concerned (or in an intermediate holding company) are as follows:

  1. An apportionment has fallen to be made in respect of an accounting period of a controlled foreign company.
  2. The controlled foreign company’s chargeable profits have been apportioned to, and tax under Chapter IV assessed on, the United Kingdom company claiming the relief.
  3. The claimant company has to dispose of

(i) shares in the controlled foreign company, or

(ii) shares in another company which gave rise to the claimant company’s interest in the controlled foreign company.

in either case the shares being shares acquired before the end of the period for which the apportionment fell to be made.

For the purposes of identifying shares of the same class acquired at different times with shares disposed of in the transaction which gives rise to the claim for relief, a ‘first in, first out’ rule applies so that shares disposed of are matched with the earliest acquisition thus ensuring that relief is obtained at the earliest opportunity.

Computation of chargeable gains relief - ICTA88/SCH26/PARA3(2) to (3)

The starting point for computing the relief against a chargeable gains liability on a disposal of shares in a controlled foreign company is the tax charged under Chapter IV before any relief for relevant allowances (see INTM256110) and ACT (see INTM256170). This follows from the concluding words of ICTA88/SCH26/PARA3(1)(d) which precisely reflect the wording of the charging provision, that is, ICTA88/S747(4)(a).

Where the claimant company disposes of shares which represent the whole of the interest by virtue of which the controlled foreign company’s chargeable profits were apportioned to it, the whole of the tax charged on it under Chapter IV (less any of that tax which has been otherwise relieved, see below) is allowable as a deduction in computing the chargeable gain accruing on the disposal of the shares.

Where the shares disposed of by the claimant company do not represent the whole of the interest by virtue of which the chargeable profits were apportioned to the claimant company, the amount of relief is reduced proportionately. This is achieved by multiplying the Chapter IV tax charged in respect of an apportionment period (see (a) of above (or a direction in periods prior to self assessment) by a fraction, the numerator of which is the average market value during that apportionment period of the shares disposed of and the denominator of which is the average market value during the same period of the whole interest. A reduction is therefore required where-

  • the company disposes of some but not all of the shares held at the end of the apportionment period, or
  • during the apportionment period, the company had an interest in the controlled foreign company by virtue of which chargeable profits had been apportioned to it.

Indexation allowance

Chapter IV tax which is allowable as a deduction in computing chargeable gains on a disposal of shares in a controlled foreign company does not qualify for the capital gains indexation allowance. This is because it is not expenditure within TGCA92/S38(1)(a) or (b).

Restrictions on double relief - ICTA88/SCH26/PARA3(2), (4) and ICTA88/SCH26/PARA6(1)

There are restrictions to prevent relief being given more than once on the same amount of Chapter IV tax. The restrictions apply in the following three circumstances:

  1. Where an amount of Chapter IV tax has been relieved under ICTA88/SCH26/PARA3 no further relief may be given under that provision in respect of it either to the claimant or to any other person.
  2. Where an amount of Chapter IV tax has been relieved under ICTA88/SCH26/PARA3, no relief may be given in respect of it under ICTA88/SCH26/PARA4 (see INTM256290).
  3. Where a dividend is paid by a controlled foreign company during or after the apportionment period but before the disposal of shares takes place, the danger of double taxation (see above) may be lessened. A restriction on the Chapter IV tax which may be the subject of a paragraph 3 claim is therefore made where the following circumstances apply:
* before the disposal of shares takes place, a dividend is paid by the controlled foreign company out of profits derived from the chargeable profits for the apportionment period (see [INTM256210](https://www.gov.uk/hmrc-internal-manuals/international-manual/intm256210)), and either
* the effect of the payment of the dividend is to reduce the value of the shares disposed of, or
* the company making the disposal is entitled under ICTA88/SCH26/PARA4 (see [INTM256230](https://www.gov.uk/hmrc-internal-manuals/international-manual/intm256230)) to underlying tax credit relief for Chapter IV tax charged in respect of the apportionment period against its liability on a dividend paid or payable on the shares disposed of.

If any of the circumstances above apply, the tax which would qualify for ICTA88/SCH26/PARA3 relief is reduced by such part of it as corresponds to the profits represented by the dividend.

The reasoning behind these alternative conditions is that if the disposal proceeds for the shares no longer reflect the apportioned profits then those profits will not be subject to a double charge. Equally, if allowance for the tax on those profits has been given by way of underlying tax credit relief, then that tax should not be relieved again.

Time limits for claims

A claim to relief under ICTA88/SCH26/PARA3 must be made within the later of-

  • 3 months from the end of the accounting period in which the claimant company disposed of the shares concerned, or
  • 3 months from the date on which the assessment on the claimant company for the apportionment period became final and conclusive.

An assessment becomes final and conclusive when the appeal period expires or the appeal is formally determined whether by the Commissioners or by agreement between the parties.

Nothing in TMA70/S42 or TMA70/SCH1A applies (whether by virtue of ICTA88/S754 or otherwise) to a claim for this relief.

Form of claim

A claim should be part of a return (including an amended return).