This article is the second and final in this series examining the various reliefs and implications which can arise within capital gains groups of companies. Part 1 set out the definition of a capital gains group and how to determine which companies are part of such groups together with some of the potential reliefs available. The rules herein are correct at the time of writing and do not take into account any legislative changes which may be implemented as a result of the end of the EU transition period on 31 December 2020
Pre-entry capital losses
In the past, a company that anticipated a future gain on the disposal of a chargeable asset would seek to acquire another company with capital losses forward often for the benefit of that company’s unused capital losses. The chargeable asset with the latent gain would be transferred before disposal into the newly acquired company with the capital loss carried forward so that this could be used to shelter the future gain.
UK legislation contains anti-avoidance provisions targeted at this type of behaviour by restricting how pre-entry capital losses can be used. The term ‘pre-entry capital loss’ refers to any capital losses which accrue to a company on actual disposals of chargeable assets before they become part of a new capital gains group. There is no restriction on post-entry capital losses.
This rule means that pre-entry capital losses cannot be used subsequently by a capital gains group that had no previous commercial connection with the company when those capital losses originally accrued. However, the company with the capital loss is able to use those losses itself in the same way that it could have had it never entered the group.
Pre-entry capital losses that accrued to the company before it joined the capital gains group can therefore be set against:
Gains on assets disposed of after entry to the capital gains group but which were held by the company before entry
A gain arising on the disposal of an asset acquired from a non-group member which has been used for the purpose of the company’s trade, or
Gains on assets disposed of before joining the group
Provided certain conditions are fulfilled, a company may claim that a chargeable gain (after indexation allowance, if any) arising on the disposal of a business asset (the ‘old asset’) may be ‘rolled over’ against the cost of acquiring a replacement business asset (the ‘new asset’).
In this scenario, the disposal of the ‘old asset’ is deemed to give rise to neither a gain nor a loss for tax purposes. The cost of the ‘new asset’ is reduced by the gain which would have arisen but for the rollover relief claimed. The gain on the disposal of the ‘old asset’ is therefore deferred until such time as the ‘new asset’ is disposed of (subject to the possibility of a further rollover relief claim being available).
Full rollover relief is available provided all of the disposal proceeds (not just the chargeable gain) from the ‘old asset’ are reinvested by the company in acquiring the “new asset”. Any proceeds not reinvested (that is the excess cash) fall to be taxed immediately as a gain (provided the amount retained is less than the gain itself). Once again, the cost of the ‘new asset’ is reduced by the amount of the gain that was not immediately chargeable due to partial rollover relief.
The conditions to be satisfied in order for a company to make a rollover relief claim are:
Both the ‘old’ and ‘new’ assets must be within one of the qualifying classes of assets but do not need to fall within the same category (see below).
The ‘old’ asset must have been used for trade purposes throughout the period of ownership and the ‘new’ asset must be used for trade purposes (mixed use is acceptable), and
The ‘new’ asset must be acquired during the period beginning one year before and ending three years after the date of disposal of the ‘old’ asset
The classes of assets which qualify for rollover relief include
Land, buildings and fixed plant and machinery
Ships, aircraft and hovercraft, and
Satellites, space stations and spacecraft
However, for companies, neither goodwill nor quotas are qualifying as these assets are within the intangible assets regime (which will feature in the April 2021 issue).
Where the ‘new’ asset is a depreciating asset (an asset with an expected life of 60 years or less at the time of its acquisition), the chargeable gain arising on the disposal of the ‘old asset’ cannot be rolled over and is not deducted from the cost of the ‘new asset’. Instead, the chargeable gain is ‘held over’ or temporarily deferred.
It becomes chargeable to tax (crystallises) on the earliest of the following three dates:
The date on which the ‘new asset’ is disposed of
The date on which the ‘new asset’ ceases to be used in the trade, or
The 10th anniversary of the acquisition of the ‘new asset’
The most common types of depreciating assets are fixed plant and machinery, and leases where the lease term is 60 years or less.
It should be noted that if a company were to purchase a non-depreciating asset (within the relevant class) prior to the expiration of the earliest of the above three dates, then the ‘held-over’ gain can be converted into a ‘rolled-over’ gain by making a claim for rollover relief.
Rollover and holdover relief within capital gains groups
Rollover relief is also available within a capital gains group. If a group member disposes of an asset which is eligible for rollover relief or holdover relief, then it is possible to treat all the capital gains group members as a single entity for claiming relief, providing that all the remaining conditions are met.
Thus, if another capital gains group member acquires a relevant asset within the qualifying period then the company making the disposal may match this with the acquisition by that other company for rollover/holdover relief purposes. Both the acquiring and disposing company must make the claim.
It should be noted that assets transferred intragroup on a no gain/no loss basis under Section 171 TCGA 1992 (see Part 1 of this series) cannot be matched for group rollover/holdover relief purposes.
Chargeable asset disposed outside the group
If there is a disposal of an asset by a member of a capital gains group to a third party outside the group, and that asset had been acquired from another capital gains group member, then the period of ownership when calculating indexation allowance is arrived at by reference to the length of time the asset was owned by the group as a whole (but up to 31 December 2017 only).
Anti-avoidance and leaving the capital gains group
Where a company ceases to be a member of a capital gains group of companies within six years of an intragroup transfer under Section 171 TCGA 1992, and at that time still owns that asset, a capital gain or loss may arise known as a degrouping charge. Where a gain arises, rollover relief cannot be claimed on such degrouping charges. The base cost of the future disposal of the asset in question by the company leaving the group is the market value attributed to the earlier transfer used when calculating the degrouping charge.
The degrouping chargeable gain or capital loss is calculated by deeming that the asset was sold and immediately reacquired by the company leaving the group at its market value at the time of its original acquisition from the other member of the group − that is, the gain (or loss) arising on the original transfer between the group members is triggered, after deducting indexation up to the time of its intragroup transfer.
Although the degrouping charge is calculated as at the date of the original intragroup transfer, it is not charged on the company leaving the group, but on the company selling the shares in the accounting period in which the company leaves the group.
Where a company leaves a group as a result of a disposal of shares by a fellow capital gains group company, any degrouping charge which arises is treated as an adjustment to the consideration taken into account for calculating the gain/loss on the share disposal, that is, as additional proceeds. A consequence of this is that any exemption or relief which may apply to the share disposal, such as the substantial shareholdings exemption (SSE), will also apply to the degrouping charge.
No degrouping charge is made in respect of an asset that has been transferred between two companies belonging to the same sub-group, if those companies leave the capital gains group together.
Section 171A TCGA 1992 (election to re-allocate gain or loss to another member of the capital gains group) can however be used to remove any degrouping gain or loss which arises, if this has not been exempted by the SSE.