UK: Corporation Tax Capital Gains Simplification


The draft legislation for Finance Bill 2011 includes several provisions simplifying the avoidance rules for corporate capital gains, and follows on from consultations during 2009 and 2010. They cover three areas:

  • value shifting – simplifying the existing legislation and restricting its application to disposals of shares or securities which have been materially reduced in value. A six year time limit is also introduced for the application of deprecatory transaction rules.
  • de-grouping charges – changing the provisions so that the charge increases consideration for the disposal of shares, so that in cases where the substantial shareholding exemption applies, there will in fact be no degrouping charge. There will also be changes so that groups organised on a divisional basis will not be penalised where assets are transferred to a newly formed company prior to disposal. The legislation will also be clarified to make clear that companies need to be members of the same group at all times between the transfer of the asset and on de-grouping in order to avoid a de-grouping charge.
  • capital losses on a change of ownership – simplifying the avoidance rules for acquired losses and relaxing their application to take account of how businesses operate in a group environment when distressed businesses are acquired.

These amendments proposed for Finance Bill 2011 will generally have effect from the date of Royal Assent.

Value Shifting

The current value shifting provisions in TCGA92 s30-34 are mechanical in their attack on avoidance of gains where there is a shift in value prior to disposal, and they have no tax avoidance purpose filter. Their application in the case of groups of companies is restricted for certain group transactions, but this can reduce a loss or increase a gain. However there is overlap with the rules in the TCGA92 s176 'depreciatory transaction' legislation. The depreciatory legislation will eliminate a loss where it applies, but cannot increase a gain, and also applies without any tax avoidance purpose filter.

It was previously accepted that a pre-sale dividend paid out of post acquisition profits was not caught by TCGA92 s176 (HMRC manual reference CG46580).

The draft legislation to be included in Finance Bill 2011 reorganises the value shifting provisions that apply for companies into a new s31 (amending s30 and replacing the existing s31-34). Its application is restricted to disposals of shares in, or securities of, another company where:

  • arrangements have materially reduced the value
  • tax avoidance (in relation to CT on chargeable gains) is the main or one of the main purposes of the transaction; and
  • the arrangements do not relate to the making of an exempt distribution.

The depreciatory provisions at TCGA92 s176 will remain unaltered, apart from cross referencing and the introduction of a six year time limit between the depreciatory transaction and the date of disposal, after which they no longer apply.

The proposed changes will apply to company disposals of shares or securities made on or after the date on which Finance Bill 2011 receives Royal Assent.

De-grouping charges

The current de-grouping charges in TCGA92 s179 can lead to problems in the following situations:

  • the admin burden of the six year time limit, particularly after several mergers and acquisitions;
  • the tax charge falls on the company leaving the group, though the economic gain is to the group from which the company is leaving;
  • potential economic double taxation – once on the asset and then again on a subsequent share sale;
  • complexities where single asset companies are used and there are transfers around a group (as with property assets for example);
  • the fact that a de-grouping charge can arise when the share sale qualifies for substantial shareholding exemptions (SSE) where the intention of the SSE is that the sale of a trading company should be free of tax. This problem can be particularly difficult where a business is organised along divisional lines and some reorganisation is required in order to parcel up a business for a corporate disposal;
  • the need to retain a company as a dormant company for six years in order to avoid a de-grouping charge after a reorganisation transferring its business and assets to other group companies, where an associated company is sold containing an asset that has been transferred as part of the reorganisation. In addition taxpayers are not clear how the provision preventing a double charge works, as highlighted in the 2008 Johnston Publishing (North) Ltd Court of Appeal case [EWCA Civ 858].

The draft legislation proposed for Finance Bill 2011 to resolve these issues is as follows:

  • the six year time limit in TCGA92 s179 will remain;
  • the de-grouping tax charge will be applied by increasing the share disposal proceeds where the de-grouping is by way of a disposal of shares, rather than a separate CGT charge. This will mean that there will no longer be a problem where the SSE applies, as the de-grouping charge will increase the disposal proceeds to be exempt under the SSE;
  • where the de-grouping charge arises otherwise than by a disposal of shares (for example by an issue of new shares), then the de-grouping charge would be a stand-alone charge in the asset holding company as at present;
  • where assets are transferred around a group prior to disposal and the SSE would apply but for satisfying the time limit in relation to the transfer, the SSE time limit condition would be treated as though the shares were held by the investing company at any time in the final 12 month period when the asset was previously used by a member of the group. This will mean that divisionalised activities can be transferred to newly incorporated companies and the SSE can apply if the SSE time limits are met in relation to that division

However corresponding changes are not being introduced to the intangible asset regime, so there may still be de-grouping charges in respect of intangible assets where otherwise the SSE would apply;

  • to prevent economic double taxation there will be a provision for reduction on a just and reasonable basis;
  • s179(2) is to be replaced to clarify that the de-grouping charge will be disapplied where two companies are in the same subgroup at all times between the date of transfer of an asset from one to the other until immediately after both leave the original group (this same exception is to be introduced for the degrouping charge under the intangible asset regime). An equivalent clarification is to be made to the intangible asset regime (principally CTA09 s783);
  • TCGA92 s179A, 179B and Sch7AB will be withdrawn as the business asset roll over relief provisions are deemed to be sufficient to deal with any gains realised on disposal of trade assets.

Some potential areas for concern with these changes include the following:

  • The new provision disapplying the s179 charge where the substantial shareholdings exemption applies does not appear to work where there is a paper for paper exchange. In such a case the CGT reorganisations provisions (under TCGA92 s139) deem that there has been no disposal (TCGA92 s135), but rather a replacement of securities of one company with another.
  • TGCA92 s179B, permitting a roll over relief claim for gains arising on deemed disposals and reacquisitions, is to be repealed. This will mean that where a degrouping charge arises because a company leaves a group without a disposal of shares (for example on a paper for paper exchange, or if entitlement to profits change so that it becomes a member of another group), there will be no possibility of rolling over that gain on the acquisition of new assets.
  • The substantial shareholding exemption does not affect any charge that might arise under the intangible asset regime, so that where an intangible asset of a divisional activity is parcelled up into a company for sale, there could still be a degrouping charge under the CTA09 intangible asset regime (as both companies concerned will not have left the group together). Thus the amendments enabling a division to be parcelled up with the avoidance of degrouping charges because of the substantial shareholdings exemption, may still have an intangible asset degrouping charge.

Capital losses on a change of ownership

TCGA92 s177A and Sch 7A limit the scope for an acquirer to offset losses accruing to an acquired company against gains on other group assets. They are mechanical in their application and have no purpose test. TCGA92 s184A was introduced in 2006 to counter avoidance schemes which circumvented Sch 7A where the aim of the transactions was to secure a tax advantage through access to unrealised losses on "pre-change" assets.

The legislation proposed for Finance Bill 2011 removes those parts of Sch 7A that refer to losses that are realised post acquisition on 'pre-entry assets', as these are covered by s184A.

Sch 7A was also limited in that pre-entry losses could only be offset against gains on assets used for a preentry trade. This restriction is to be relaxed so that pre-entry losses can be used against assets used in a preentry trade or business. A further change will remove the restriction that the same company had to carry on the business after the change in order to use the losses. It will be sufficient that the business is carried on somewhere in the group.

The commencement of these new rules (once approved) will be the date on which Finance Bill 2011 is passed. Unused pre-entry losses realised since acquisition on pre-entry assets will be treated as if they were realised at the date of acquisition, on commencement of the new rules.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Richard Mannion
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