CG45456 - Charge on companies leaving groups: exclusions: associated companies leaving same time

The purpose of the exception is to prevent a degrouping charge at the asset tier if the latent asset-tier gain is effectively included as a component in a tax charge at the shareholder tier. If a parent company disposes of a sub-group, and an asset has previously moved around exclusively within the sub-group, any latent asset-tier gain will be reflected in the gain at the shareholder tier when the parent company disposes of the shares in the company heading the sub- group. There is accordingly no need for a separate asset-tier charge on a member of the sub-group which has acquired the asset from another member of the sub-group.

Example

Company A has directly held subsidiaries B and C, and company C has directly held subsidiaries D and E. Company C accordingly heads a sub- group comprising C, D and E. In year 1, company B disposes of asset X to company D. In year 2, company C disposes of asset Y to company E. In year 5, company A sells the shares in company C. As a result companies C, D and E cease at the same time to be members of the group headed by company A.

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When company A sells the shares in C, there is no degrouping charge on company E in respect of asset Y. Companies C and E are associated companies ceasing to be members of the A group at the same time, and the degrouping charge does not apply to E's acquisition of asset Y from C. This accords with the commercial reality that any increase in the value of asset Y while in the ownership of either C or E will be reflected in the gain at the shareholder tier when company A sells company C.

The position is different for asset X transferred from company B to company D. Companies B and D are not associated companies leaving the group at the same time, so there is a degrouping charge on company D by reference to the market value of asset X immediately after its acquisition from company B.

For this exception to the degrouping charge to apply in respect of any particular asset that has been transferred within a group, the transferor and transferee companies must be “associated companies” –

• at the time of the asset transfer referred to in TCGA92/S178 (1) and TCGA92/S179 (1). This was confirmed by the Court of Appeal in Johnston Publishing (North) Ltd v HMRC [2008 EWCA civ 858]
• at the time they leave the group; this includes the requirement to be associated immediately after they cease to be members of a group. This was confirmed by the Court of Appeal in Dunlop International AG v Pardoe (HMIT) [1999 EWCA civ 2043, 72TC71].
• throughout the period between the above times, see final paragraph of CG45456a.