ATXUK

Degrouping charge 3 / 4

Degrouping charge

A degrouping charge may arise where a company:

  1. Leaves a capital gains group

  2. Within six years of acquiring an asset via a no gain, no loss transfer

  3. Still owning the asset

Calculation of the degrouping charge:

Proceeds (M.V. at the date of the intra-group transfer)

Less: Cost to the group

Less: Indexation allowance

= Degrouping charge

This is basically the chargeable gain that would have arisen at the date of the original transfer if at that time the companies had not been members of the same 75% gains group.

What do you do with this charge?

The charge will now be added to the consideration received by the selling company in respect of the company that has left the group. If there is a degrouping loss, this will be deducted from the consideration.

Note

It should be recognised that the increase to the consideration received by the selling company will often be irrelevant due to the availability of the substantial shareholding exemption (SSE).

  • Recap – selling shares in a trading company where there is 10% ownership overall, results in no taxable gain

  • Therefore, if the SSE is available, the whole of the chargeable gain on the sale of the shares, including the element relating to the degrouping charge will be exempt from tax.

Illustration

Blue Ltd. sold its wholly owned subsidiary Rainbow Ltd. on 15 April 2023. 

Blue Ltd. had purchased a building on 1 August 1997 for £180,000. 

On 1 December 2012, the building was transferred to Rainbow Ltd. for £230,000. 

It’s market value on the date of the transfer was £375,000. 

Rainbow Ltd. still owned the building on 15 April 2023. 

Both companies prepare accounts to 31 March each year. 

Indexation Factor (Aug 97 - Dec 12) 0.564

  • What are the tax implications of the sale of Rainbow Ltd?

Solution

When Rainbow Ltd. leaves the group, the company still owns an asset which it had acquired from Blue Ltd. in the years preceding Rainbow Ltd.’s leaving.

Degrouping charge:

Proceeds £375,000

Less: 
Base cost (£180,000)
I.A. (Aug 97-Dec 12) (0.564 * £180,000)    (£101,520)

Degrouping charge £93,480

This charge is added to the consideration received by Blue Ltd. on the sale of the shares in Rainbow Ltd.

However, any gain is likely to be exempt under the SSE rules as Blue Ltd. has owned 10% of the shares for 12 months out of the previous six years.

Note:

Where an intangible asset has been transferred between the group companies at no gain no loss within 6 years of the transferee leaving the group, no degrouping charge will arise on the deemed disposal if the disposal qualifies for the substantial shareholding exemption.

Companies leaving a group

Group relief ceases to be available once arrangements are in place to sell the shares of a company.

This will usually occur sometime before the actual legal sale of the shares.

  • HMRC consider that arrangements come into existence once there is agreement in principle between the parties that the transaction will proceed. 

    This is so even though such agreement is still subject to contract and not finally binding on either party.

  • HMRC will look at correspondence and details of the negotiations to determine the date of arrangements coming into force. 

    For the exam, you will be given a date on which a company is deemed to leave a group, and from that date, group relief will cease to be available.