Part 3 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).
So far we have reviewed the definitions of a group relief group and a capital gains group, transfers at no gain, no loss and degrouping charges.
The remaining parts of this article continue to examine tax planning and other issues relating to capital gains groups. This part looks at the election to transfer a chargeable gain or allowable loss to another group company, rollover relief and pre-entry capital losses.
This election is a tax planning opportunity and something that you need to watch out for in exam questions. It enables the whole or part of a chargeable gain or allowable loss realised in the current period to be transferred from one group company to another. The availability of this election means that it does not matter which company in the group sells a particular asset. The gain arising, or any part of it, can be transferred to another company, to take advantage of that company’s capital losses or lower rate of corporation tax. Similarly, the whole or part of any allowable loss can be transferred to another group company if desired.
When minimising the corporation tax liability of a group of companies, you must recognise that any chargeable gains or allowable losses can be transferred in whole or in part to any of the group companies, in addition to dealing with group relief. When transferring a chargeable gain, your thinking should be the opposite of group relief such that the gain should be transferred to the company paying tax at the lowest rate. Take care, however, as the chargeable gain will increase the company’s profits and may, therefore, change its tax rate.
There is also the issue of cash flow to consider. Companies with augmented profits in excess of £1,500,000 (as reduced by reference to the number of associated companies) are required to pay corporation tax in instalments. Accordingly, the cash flow position of the group will be improved if a chargeable gain is transferred from a company required to pay tax by instalments to one with a tax payment date of nine months and one day after the end of the accounting period. Take care, however, as the chargeable gain transferred will increase the company’s profits and may, therefore, increase its profits to an amount in excess of the quarterly instalments threshold.
The companies in a gains group are treated as a single entity for the purposes of rollover relief. This means that the gain on a qualifying business asset sold by a company in a gains group can be rolled over when a qualifying business asset is purchased by any company within the gains group within the qualifying period.
In addition to the possibility of degrouping charges, you may need to point out to the purchaser of a company that restrictions apply to the use of that company’s pre-entry capital losses. Pre-entry capital losses are the capital losses that the target company is carrying forward at the time it is acquired.
Pre-entry capital losses can only be used against gains arising on:
The effect of this rule is that the group of companies acquiring the target company cannot use the company’s pre-entry capital losses to relieve gains on group assets.
The ability to transfer any amount of a chargeable gain or allowable capital loss from one company in a gains group to another means that great care must be taken when advising a group of companies on its tax position. Take the time necessary to identify all of the available possibilities before you try to reach a decision on the strategy to be adopted.
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.