GREIT05055 - Capital gains: transactions within groups: examples (2)

These situations use the same facts as situation 1 in GREIT05050.

Situation 2

The occupation of A by the group does not proceed, and A finds a new tenant for X. On 1 July 2008, P sells its shares in A to an unrelated company Q that is not a UK-REIT. The market value of X is 1,700 at the date of sale, and the shares are sold for 1,700.

Under section 171 TCGA, the 1 May 2005 transfer is at no gain/ no loss and the base cost of X in A’s hands is 800 (the original cost to X). On joining the regime, there is a deemed sale and repurchase at market vale, but the gain of 500 is disregarded. A (residual) pays an Entry Charge of 26 (2% of the market value 1,300 at entry) in respect of X.

When A leaves the group on 1 July 2008, there is a deemed sale of X by A at market value immediately after acquisition. However, because A (tax-exempt) is treated as a separate company from A (pre-entry), the acquisition in point is that on entry to the regime so a gain of 400 accrues on 1 July 2008 which is exempt from tax.

Thus no chargeable gain arises in relation to property X. But the shares in A that are owned by P are part of P (residual). The gain of 600 (= 1,700 – 1,100) on disposal of those shares is a chargeable gain accruing to (and therefore taxable on) P (residual).

Situation 3

As with situation 2 although rather than selling the shares in A for cash, P receives shares in the Q group (but this does not affect its REIT qualifying status).

The analysis in terms of A ceasing to have tax exempt activity and the application of the de- grouping charge will be the same as for a cash sale.

There will be no immediate chargeable gain on the share sale. P (residual) will be treated as having acquired the shares in Q for the amount it originally paid for those in A, 1,100.