For a long time, it has been possible to transfer assets within a group of companies without triggering a chargeable gain. In broad terms, a capital gains group needs to have at least a 75% direct link between each company (based on various measures) and an effective >50% link. Importantly, this is less restrictive than a loss relief group which requires an effective 75% relationship.
Example 1: Company A has a 75% stake in Company B which in turn has a 75% stake in Company C which in turn has a 75% stake in Company D. Company A also has a 60% stake in Company E. Here, Company A is in a group with Company B and Company C but not Company D (it only has a 42% indirect stake). It is not in a group with Company E because it does not have a 75% direct link. Company B is however in a group with Company D.
Before 1 April 2000 companies used to physically transfer assets within a group so as to ensure that efficient use could be made of capital losses.
Example 2: The companies in
Example 1 all have a 31 December year end. In October 1999 Company A is about to dispose of a property to a third party which would give rise to a chargeable gain of £500,000. At the time Company C has brought forward capital losses of £300,000. Therefore, following advice, Company A transfers the asset to Company C at market value (or possibly somewhat lower) and Company C makes the sale. For tax purposes, Company A is treated as selling the property for an amount that does not give rise to a gain, or a loss and Company C is treated as acquiring the property at this price. Therefore, when Company C sells the property to the third party it will make the £500,000 gain, but it will be able to relieve its brought forward £300,000 loss against this.
From 1 April 2000, group companies did not need to go through the hassle of actually making a physical transfer of property because they could simply deem the transfer to have happened by making an election under TCGA 1992 s 171A.
Key points of a s 171A election:
By reference to Example 2 (assuming that the fact pattern took place after 31 March 2000), an election could be made within two years following 31 December of the year that Company A made its disposal.
This would effectively treat all or part of the property as having been transferred from Company A to another group member even though it had not been.
Any payment that is made in respect of the election (up to the level of the gain) is ignored for the purposes of corporation tax.
Such an election must be made jointly between Company A and the ‘recipient’ company.
The requirement that a gain or loss accrues ‘in respect of an asset’ means that there does not actually need to be a true disposal. Therefore, an election can work for things like negligible value claims and gains that are triggered by the receipt of insurance proceeds.
Our view: Section 171A elections have been available for intra-group transfers for many years; however, anecdotally, not as much use is made of them as could be the case. Since 2017, trading losses have been available to set against all profits and so there will be cases where a gain can more usefully be made to arise in another capital gains group member (with losses), where the relationship between those companies does not allow those losses to be surrendered in the opposite direction.
Sales are often agreed by shareholders with little thought about the position of other group members, and so it is helpful that ‘retrospective’ action can be taken within two years of the disposing company’s accounting period. This kind of planning should always be considered when a significant gain or loss has been made by a group member and it is also helpful that payments can usually be made to the company whose losses are being utilised, free from tax implications.
For a long time, it has been possible to transfer assets within a group of companies without triggering a chargeable gain. In broad terms, a capital gains group needs to have at least a 75% direct link between each company (based on various measures) and an effective >50% link. Importantly, this is less restrictive than a loss relief group which requires an effective 75% relationship.
Example 1: Company A has a 75% stake in Company B which in turn has a 75% stake in Company C which in turn has a 75% stake in Company D. Company A also has a 60% stake in Company E. Here, Company A is in a group with Company B and Company C but not Company D (it only has a 42% indirect stake). It is not in a group with Company E because it does not have a 75% direct link. Company B is however in a group with Company D.
Before 1 April 2000 companies used to physically transfer assets within a group so as to ensure that efficient use could be made of capital losses.
Example 2: The companies in
Example 1 all have a 31 December year end. In October 1999 Company A is about to dispose of a property to a third party which would give rise to a chargeable gain of £500,000. At the time Company C has brought forward capital losses of £300,000. Therefore, following advice, Company A transfers the asset to Company C at market value (or possibly somewhat lower) and Company C makes the sale. For tax purposes, Company A is treated as selling the property for an amount that does not give rise to a gain, or a loss and Company C is treated as acquiring the property at this price. Therefore, when Company C sells the property to the third party it will make the £500,000 gain, but it will be able to relieve its brought forward £300,000 loss against this.
From 1 April 2000, group companies did not need to go through the hassle of actually making a physical transfer of property because they could simply deem the transfer to have happened by making an election under TCGA 1992 s 171A.
Key points of a s 171A election:
By reference to Example 2 (assuming that the fact pattern took place after 31 March 2000), an election could be made within two years following 31 December of the year that Company A made its disposal.
This would effectively treat all or part of the property as having been transferred from Company A to another group member even though it had not been.
Any payment that is made in respect of the election (up to the level of the gain) is ignored for the purposes of corporation tax.
Such an election must be made jointly between Company A and the ‘recipient’ company.
The requirement that a gain or loss accrues ‘in respect of an asset’ means that there does not actually need to be a true disposal. Therefore, an election can work for things like negligible value claims and gains that are triggered by the receipt of insurance proceeds.
Our view: Section 171A elections have been available for intra-group transfers for many years; however, anecdotally, not as much use is made of them as could be the case. Since 2017, trading losses have been available to set against all profits and so there will be cases where a gain can more usefully be made to arise in another capital gains group member (with losses), where the relationship between those companies does not allow those losses to be surrendered in the opposite direction.
Sales are often agreed by shareholders with little thought about the position of other group members, and so it is helpful that ‘retrospective’ action can be taken within two years of the disposing company’s accounting period. This kind of planning should always be considered when a significant gain or loss has been made by a group member and it is also helpful that payments can usually be made to the company whose losses are being utilised, free from tax implications.
.tmb-editorspic.jpeg?sfvrsn=7981419_1)
