ATXP6 UK
Syllabus A4. Corporation Tax A4e. Group Structure for C.T.

A4evii/A4eviii. Degrouping charge

Syllabus A4evii/A4eviii)

Determine the degrouping charge where a company leaves a group within six years of receiving an asset by way of a no gain/no loss transfer
and
Determine the effects of the anti-avoidance provisions, where arrangements exist for a company to leave a group

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 2018. 

Blue Ltd. had purchased a building on 1 August 1996 for £180,000. 

On 1 December 2011, 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 2018. 

Both companies prepare accounts to 31 March each year. 

Indexation Factor (Aug 96 - Dec 11) 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 six years preceding Rainbow Ltd.’s leaving.

Degrouping charge:

Proceeds £375,000
Less: 
Base cost (£180,000)
1.A. (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 out of the previous six years.

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.