CG45405 - The degrouping charge: when a charge is triggered, general rule
TCGA92/S179 (3)
Generally the event which triggers a degrouping charge is a company ceasing to be a member of a group owning an asset acquired from another group member within the previous six years.
FA2000/SCH29/PARA1 changed the definition of a group to include companies not resident in the UK (CG45120) and as a consequence where the transfer of the asset which may give rise to a degrouping charge takes place on or after 1 April 2000, a degrouping charge will arise only if the asset was within the charge to Corporation Tax on chargeable gains (CG45301) immediately before and after the transfer.
There were transitional rules dealing with transfers of the asset before 1 April 2000 affected by degrouping events after that date, see CG45475.
The first main condition for the degrouping charge, TCGA92/S179 (1), is that a company (referred to as `company A’) acquires an asset from another company in the same group (company B), and leaves that group within the following six years. The second main condition, in TCGA92/S179 (3), is that when company A leaves the group
- either it, or an `associated company’ (see below) leaving the group at the same time,
- owns (otherwise than as trading stock),
- the asset, or another asset against which a gain on the first asset has been rolled over.
If these conditions are met the result is a deemed disposal by the chargeable company as at the time immediately following the intra-group transfer, so reinstating the gain or loss that would have arisen but for the no gain/no loss rule in TCGA92/S171. Note that a degrouping charge triggered by a company leaving a group on or before 19 July 2011 will simply result in a gain or loss accruing to company A but for charges triggered following that date the charge may result in an adjustment to the disposal consideration of the group company that makes a disposal of shares in company A. See CG45420 and CG45425 for guidance on how and when a gain or loss from a degrouping charge will accrue.
Assets acquired before companies become members of the same group
Multiple transfers within a group
Example
In year 1 company M transfers an asset to its subsidiary N, and five years later M sells the shares in N to an unconnected third party. A degrouping charge is triggered and N is treated as if, immediately after its acquisition of the asset from M, it had sold and immediately reacquired the asset at its market value at that time.
The main conditions for a degrouping charge are satisfied. N ceases to be a member of a group at a time when it owns an asset acquired from group company M within the previous six years. The charge is computed by reference to a deemed market value disposal of the asset immediately after it was acquired by the company leaving the group (that is, immediately after the acquisition by N from M). The value to be used is not the market value of the asset at the time the chargeable company leaves the group but the market value at the earlier time when it was acquired by company N.
Assets acquired before companies become members of the same group
For degrouping charges triggered by a company leaving a group on or after 19 July 2011 the companies involved in the transfer of the asset must be members of the group at the time of the transfer of the asset. Previously, there was no such requirement and in theory a degrouping charge could be triggered even where company A acquired an asset from company B at arm’s length, subsequently joined B’s group, and, within six years of the asset transfer, left that group while still holding the asset. In such a situation, no gain or loss should arise in practice where company A acquired the asset from company B at market value: a deemed disposal immediately after the real acquisition from company B would not result in any gain or loss. A degrouping charge should only arise in practice where the transfer of the asset was at a value other than market value, in particular as a result of the no gain/no loss rules: TCGA92/S171(1), TCGA92/S139 and TCGA92/S140A.
Multiple transfers within a group
A charge is triggered where the asset is owned by an “associated company” of company A when that company leaves the group. TCGA92/S179(10) provides that companies are associated when they are in a 75% group relationship, see CG45170. This preserves a degrouping charge where, following the initial transfer from company B, the asset is then transferred from company A to a company that leaves the group at the same time as A.
Whole group taken over
Where a whole group is taken over by another then the rule in TCGA92/S170(10) (see CG45190) will generally ensure that no degrouping charges will be triggered but this general rule is modified in certain circumstances see special rule 2 in CG45410.