GREIT05055 - Capital gains: transactions within groups: examples (2)
These situations use the same facts as situation 1 in GREIT05050.
Situation 2
The occupation of X 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 company A leaves the REIT group on I July 2008 there is a deemed disposal and reacquisition of assets involved in the property rental business at market value (S131(2) and (3) FA 2006. The gain arising between the base cost of 1300 (market value on joining the regime) and the deemed consideration of 1700 (market value on leaving the regime) is ignored (section124 FA 2006). The base cost for future disposals is 1700 (unless the asset is disposed in circumstances where section 132 would apply (see GREIT 11325) 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.
