CW Energy LLP

Draft Finance Bill 2011 proposals and clauses – Abolition of capital gains degrouping charge

At present, if a company leaves a group owning an asset which it has acquired from another member of the group within the previous 6 years under a transfer which was tax free at the time, there is a deemed capital gains disposal event in the company, whereby the company is deemed to have disposed and reacquired the asset at its market value as at the date it acquired it.  This is so even though the disposal of the shares themselves may be exempt as a result of the application of the substantial shareholding exemption (SSE).

Although there are provisions to allow any such gain to be transferred intra group, or rolled over in the company or any other seller group company, it is often difficult to avoid a tax charge arising and careful planning is required to avoid this situation.

The draft FB 2011 clauses contain provisions which significantly reduce the impact of such a degrouping charge.  The effect of the proposed legislation will be that if the company elects, the gain arising on the deemed disposal as a result of leaving the group will be treated as additional consideration for the disposal of the relevant shares; thus, if the disposal of the shares qualifies for the SSE, the whole of the gain, both actual, on the sale of the shares, and deemed, arising as a result of the degrouping charge, will be exempt.

If such an election is made the deemed market value tax basis of the asset is reduced by the amount by which the consideration for the disposal is increased.  Thus in most cases the basis for the asset will continue to be the group historic cost.

If a number of companies leave the group at the same time as the result of the sale of a company which itself holds shares in other group companies and there is a degrouping charge in one or more of them, if the election is made for all the companies, these gains will be added to the proceeds for sale of the shares in the company sold.

The existing provisions which allow companies the ability to roll over the degrouping gain or to reallocate the gain within the group will be repealed and in their place changes will be made to section 171A to allow for a degrouping gain to be reallocated under those provisions.

However if a company leaves a group otherwise that as a result of a sale of shares e.g. by means of a new issue of shares, the degrouping charge will remain within the company.


Industry have lobbied for some time for this charging provision to be abolished and the FB 2011 provisions effectively mean that in most cases there will no longer be a chargeable gain arising in the company being sold.  Care would need to be taken however with structures that involves issuing new shares to third parties who could cause the issuing company or any affiliate to leave the group.

There are also provisions amending the SSE rules to allow SSE to be available for the sale of the shares in a newly incorporated company if a trade is transferred into it from another group company; previously it was necessary for the seller’s group to have owned the shares in the target company for at least 12 months and for the company to have been a trading company for at least this period of time.  The new provisions achieve this by deeming the period of ownership of the transferee company to extend to the time the transferred assets have been used for a trade within the group.  In these circumstances the transferee company will also be treated as having carried on the trade for this same period.

Assuming these provisions become law as drafted, they will be effective for share disposals from the date that FB 2011 receives Royal Assent i.e. sometime around late July 2011, regardless of when the intra group asset transfers occurred.


The effect of these rules is that a newly incorporated company can be used to sell trading assets providing those assets have been used as trading assets within the group for at least 12 months.

Therefore, when assets are to be sold there is now a clear choice as to how this can be done.  The assets can either be sold by way of an asset sale (if for example it was expected that reinvestment relief can be claimed to exempt a ring fence gain) or they can be transferred to a fellow subsidiary and the shares in that company sold, without generating any capital gains charge, providing the conditions for the election are satisfied.

Once enacted, this will mean that there will be no need to keep assets in separate companies, and all a group’s interests can be amalgamated in fewer appropriate companies.

This greatly simplifies group structuring for assets and will also mean, for example, that there is no need to retain dormant companies from which assets have been transferred in order to avoid the de-grouping charge.  Once these provisions become law these companies can be liquidated if required.