GREIT05050 - Capital gains: transactions within groups: examples (1)

The example here and at GREIT05055 illustrates how sections 171, 171A, 135 and 179 TCGA operate where a Group REIT is involved. Indexation is ignored.

Facts for examples

A Group REIT consists of principal company P and two subsidiaries, A and B. P carries on most of the group’s tax-exempt business together with some other activities, referred to here as P (tax-exempt), P (residual).

P had acquired property X on 1 January 2004 for 800. P transferred the property to the newly incorporated company A on 1 May 2005. At this time the market value of X was 1,100 and that is the amount P subscribed for the share capital of A. The market value of X on 1 January 2007 (the date the group joins the regime) was 1,300. A has no other activity apart from renting out X.

B carries on only non tax-exempt activities.

The deemed groups are

• G (property rental business), a group consisting of P (tax-exempt) and A (tax-exempt) (B has no tax-exempt activities),
• G (pre-entry), a group consisting of P, A and B (up to the date the group joined the regime), and
• G (residual), a group consisting of P (residual) and B (since A has no residual business and B has no tax-exempt business).

For the purposes of sections 171 and 171A TCGA it is only necessary to make a distinction between two groups

• G (property rental business), and
• G (“other”)

Situation 1

On 1 May 2007, P started to occupy X as the headquarters of the group, when the market value of X is 1,500. P pays rent to A, as owner of X. The asset ceases to be part of is the business of A (tax-exempt) and transfers to the business of A (residual). G (residual) now consists of P (residual), A (residual) and B. Put simply, all the tax exempt activity is now conducted by P.

Although legal ownership of X has not changed, it has left G (property rental business) to join a separate group for the purposes of S171 TCGA and an adjustment is necessary.

The immediate effect is straightforward – A (tax-exempt) disposes of X to A (residual) at market value of 1,500. The disposal by A (tax-exempt) is, of course, exempt.

A de-grouping charge may be triggered in the future if A is sold. It will be treated as disposing of X at market value at the time of acquisition. However, in practical terms there is no effect because the acquisition in question was already at market value because A (residual) is treated as a separate company to A (tax-exempt) for the purposes of corporation tax (section 113(2) FA 2006).

Two more situations based on the same facts are considered in GREIT05055.