Capital gains tax reliefs exist to cater for the fact that businesses are often organised in groups of companies. A group of companies under Company Law comprises a holding company and one or more layers of subsidiaries
Companies are said to be in the same group when one is a parent or subsidiary of another (either directly or indirectly )or both are subsidiaries of another company).
Having different companies can be useful from a business organisational perspective. The trading risk associated with the business may be isolated within a single company.
Requirement for Relief
Transfers between companies may raise capital gains tax issues. As set out in other chapters, there are favourable reliefs from corporation tax in respect of the payments between group companies.
All things being equal, a transfer between two connected companies is deemed to be a sale at open market value. The capital gains arising since the company acquired the asset would be chargeable but for relief. For this reason, there exist reliefs to facilitate the transfer of assets between group companies.
A very obvious form of tax avoidance would be to transfer an asset to a new dummy company within the group and then sell the company out of the group. For this reason, anti-avoidance deems there to be a capital gain when the company ceases to be a member of the group. Other more complex, anti avoidance Legislation also exists.
Capital gains tax issues are of prime importance in the context of reorganisation of companies. Stamp duty issues also arise. A reorganisation may involve an amalgamation of companies or partition.
Tax legislation does not have a readymade relief for partition of businesses between shareholders. Tax legislation allows relief for reorganisations which do not involve a change in the overall shareholders.
The definition of a group for capital gains tax purposes is narrower than that for company law purposes. For company law purposes a group can be constituted with a 50 percent plus one shareholding or indeed alternatively by the issue of certain shares by which another company may control the composition of the board of directors.
For capital gains tax purposes, a group must comprise of a holding company and companies which are 75 percent subsidiaries. This means that the holding company must own 75 percent of the share capital. This 75 percent may be owned directly or indirectly. Where it is held indirectly it is held via another subsidiary.
The required shareholding refers to beneficial shareholding. It is not enough that the shares are nominally held. The company must be beneficial owner of the shares and must be entitled to 75 percent of the divideinds / distributions and 75 percent of the assets on a winding up. This is to prevent the creation of artificial groups by creating different classes of shares with less than the standard rights normally attaching to shares.
The principal company and the 75% subsidiaries must be resident in an EEA state or the United Kingdom. The 75% holding may be direct or indirect.
Transfer of Assets
Where there is a group for capital gains tax purposes, an asset may be transferred free of capital gains tax. It is deemed to pass at the price that yields no loss or no gain. This determines that there is no capital gain by the disposing company. The requirement for the withholding tax clearance certificate will still generally apply.
The acquiring company is deemed to acquire the asset at the same time and at the same cost as the disposing company. Therefore from a s CGT perspective the holding by group is treated in effect, as a whole. When the asset is ultimately disposed of by the acquiring company for capital gain during the requisite time is charged.
Leaving the group
Where a company receives assets from another company within its group and then leaves the company, a capital gains tax charge arises. This is deemed to arise at the date the asset was originally acquired. The provision applies where the company leaves the group within 10 years.
In both of the above cases the gain is calculated retrospectively as at the date of the transfer of the asset not the date on which the company leaves the group.
The gain is assessed on the company leaving the group. However the parent or other group companies may also be assessed for the tax.
There are exemptions where the company leaves by reason of liquidation or bona fide a commercial reason or where both the transferee and transferor group leaves the group together and both remain associated.
There is another exception where the company technically leaves the group as a result of a merger with another company.
Artificial Use of Losses
There is anti-avoidance legislation designed to prevent the use of the relief to create artificial loss. Where assets are transferred between group members in a so-called depreciatory transaction, the loss arising from subsequent sale of shares in that company (which has been denuded of value by the transfer) is not allowed.
There is an anti-avoidance provision when a company is denuded of value prior to a sale by a substantial dividend. Generally dividends within a group are free of tax. Like the depreciatory transaction provision its effect is to deny the loss that would otherwise arise.
There are rules restricting the purchase of companies which hold capital losses on their assets. This is to prevent companies purchasing other companies as members of their group and utilising the losses, triggering the losses on both assets for offsetting against profits in the group.
Losses which exist at the time the company is purchased may only be used against gains in respect of assets held at the time it entered the group and assets which are later acquired and used exclusively for the purpose of a trade conducted by it.
Unlike the position with corporation profits tax loss, it is not possible to pass capital gains tax losses around a group. It is necessary to transfer the assets to the company with the off-setting gain and realise the loss in that latter company.
The capital gains tax relief does not apply to transfer certain transfers of share and loan capital which are effectively comprise repayment or redemption of the capital.
Transfers to and from Stock
Where assets are held as trading stock (as opposed to capital assets) where there is a transfer to another group company to be held as an investment, (i.e., a capital asset) the transferring company is deemed to have appropriated the asset from stock before the transfer at its acquisiton value.The transferee is therefore deemed to have acquired has its value when it first was acquired. There is deemed to be disposal as a no profit and no loss. The acquiring company has been deemed to acquire at the original acquisition cost.
In the reverse situation where a capital asset is transferred to be held as stock in another company, it is deemed to be transferred by the transferor company at cost and the transferor company is deemed to acquire it cost and resell and reacquire it at market value. The acquiring company is deemed to realise a profit on the deemed sale which is subject to corporation profits tax.
The relief in in respect of transfer of assets other than trading stock between members of groups of companies applies to companies which are resident in countries with which the state has a double taxation treaty pursuant to Finance Act 2017.
Brexit UK and reliefs
Finance Act 2019 ensures that the status quo is maintained in relation to certain corporation tax measures or reliefs in the event of a disorderly exit of the UK from the EU. Any reference to a company in the relevant legislation, which relate to groups of companies and chargeable gains, is a reference to a company which is resident in an EU Member State or an EEA state with which there is a double taxation treaty with Ireland.
Companies which are resident in the UK continue to be regarded as being in a group of companies in the event of a disorderly Brexit, so that the reliefs fpr
- company amalgamations by exchange of shares,
- company reconstructions and amalgamations
- transfers of trading stock within a group and
- replacement of business assets by members of a group
continue to apply in the case of such companies. In addition, it will ensure that an immediate tax charge will not arise solely as a result of the UK ceasing to be an EU Member State.