Part 2 of 4
This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).
In Part 1 of this article we reviewed the definitions of a group relief group and a capital gains group.
The remaining parts of this article examine tax planning and other issues relating to capital gains groups. This part looks at transfers at no gain, no loss and degrouping charges.
The transfer of assets between companies in a capital gains group at no gain, no loss should not be regarded as a significant tax planning opportunity. This is because there is no need to transfer assets in order to realise a chargeable gain or allowable loss on an external sale in a group company other than the one making the sale; the gain or loss can be transferred to the appropriate group member after the event simply by submitting an election (see below).
The no gain, no loss transfer rule enables the directors of a group of companies to carry out commercial transactions, for example, the transfer of an asset, or even a whole trade, from one company to another without giving rise to any chargeable gains. Similar rules ensure that no stamp duty or stamp duty land tax arises on such transfers although, for stamp taxes, the effective ownership required in non-directly held subsidiaries is 75% as opposed to more than 50%.
If a company, MT Ltd, is to be sold by QR Ltd, a member of a capital gains group, a review should be carried out in order to identify all no gain, no loss transfers to MT Ltd within the six years prior to the sale. Any such transfers will give rise to degrouping charges if MT Ltd still owns the asset(s) transferred.
A degrouping charge is calculated by treating MT Ltd as having sold the asset for its market value as at the time of the no gain, no loss transfer. A chargeable gain (reduced by indexation allowance up to the date of the no gain, no loss transfer or December 2017 if earlier) or allowable loss is calculated in the normal way. This gain is then added to the consideration (or, if it is a loss, to the cost) received by QR Ltd in respect of the company that has left the group (MT Ltd). This will have the effect of increasing the chargeable gain realised by QR Ltd on the sale of MT Ltd (or reducing it if the asset concerned had fallen in value by the date of the no gain, no loss transfer).
It should be recognised that the change to the gain/loss realised by QR Ltd will often be irrelevant due to the availability of the substantial shareholding exemption (SSE). Where the SSE is available the whole of the chargeable gain on the sale of MT Ltd, including the element relating to the degrouping charge, will be exempt. Similarly, relief will be denied for the whole of any loss. The SSE is covered in more detail in the final part of this article.
Where the SSE is not available, a potential degrouping charge can be avoided by MT Ltd selling the asset concerned to a fellow group company before it leaves the group. It may then be necessary for MT Ltd to rent the asset if it is needed by its business. An alternative method of avoiding the charge is for MT Ltd and the company which made the no gain, no loss transfer to be sold as a self-contained capital gains group.
Illustration
QR Ltd owns 100% of the ordinary share capital of a number of subsidiary companies such that the companies are all members of a capital gains group. The companies prepare accounts to 31 March.
QR Ltd sold MT Ltd, one of its subsidiaries, for £280,000 on 1 September 2023. MT Ltd owns an asset that it acquired from another company within the group as a result of a no gain, no loss transfer within the six years prior to 1 September 2023.
The degrouping charge arising as a result of MT Ltd leaving the group has been calculated as £75,000. This is added to the consideration received by QR Ltd for the sale of MT Ltd. The effect of this is to increase QR Ltd’s chargeable gain on the sale of MT Ltd by £75,000. However, if the SSE is available in respect of the sale of MT Ltd, the whole of the chargeable gain on the sale will be exempt.
It should be remembered that the transfer of an asset between two companies in a gains group takes place automatically at no gain, no loss. This means that you must pay attention to the underlying group structure when setting out the tax implications of transactions in the exam. Degrouping charges are a form of hidden charge in that they arise as a result of something that happened some time ago. Accordingly, it is easy to miss them.
Note: Corporation tax issues are considered in two further articles:
Written by a member of the ATX-UK examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and the ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.