BIM70630 - Business changes: succession and changes in ownership: effect of succession on basis of assessment

The significance of ‘succession’ for tax purposes lies mainly in the special rule that applies to the computation of income tax profits on succession. ICTA88/S113 (1) ( BIM72235) requires the predecessor’s profits to be computed as if the trade had been permanently discontinued, and the successor’s profits to be computed as if the trade had been newly set up and commenced. In other words, there is a ‘deemed’ discontinuance and a ‘deemed’ commencement.

But the current year basis of assessment has minimised the impact of cessation and commencement on the assessment of business profits for individuals and partnerships (a similar situation has prevailed since 1965 with regard to the parallel CT provisions in ICTA88/S337 (1) (CTM02100)). This means that succession is no longer as significant as it once was. But it is still an issue in some other situations (for example, the transfer of rights to receive post-cessation receipts to a successor - ICTA88/S106 (2) ( BIM80530)).

The deemed cessation of a trade normally prevents the carry forward of losses. So the successor cannot set off losses sustained by the predecessor. But if a company sells its trade to a third party and reacquires it some years later it can carry forward trading losses from the earlier period to the later period. There are also special rules where a trade or part-trade is transferred between companies in common ownership (CTM06000 onwards).