CIRD40250 - Intangible assets: groups: tax-neutral transfers: conditions

CTA09/PART8/S775

Companies affected

Both the companies involved in the transfer of a chargeable intangible asset need to be members of the same group, as defined in CIRD40030 onwards, at the time of the transaction. In addition:

  • neither the transferor nor the transferee must be a qualifying friendly society within the meaning of ICTA88/S461A (which continues to have effect by virtue of FA12/SCH19/PARA1); and
  • the transferee must not be a dual resident investing company within the meaning of CTA10/S109, formerly ICTA88/S404 (see CTM34560).

These exceptions are made to avoid the risk of exploitation of mismatches between the tax treatment of the two parties.

Assets affected

The asset must be:

  • a ‘chargeable intangible asset’ (see CIRD20035) in the hands of the transferor immediately before the transfer, and
  • a chargeable intangible asset in the hands of the transferee company immediately after the transfer.

However, CTA09/S775(4) excludes an asset that has been used at any time for the purposes of a foreign permanent establishment where a CTA09/S18A election has effect in relation to the transferor. CTA09/S776 will not apply; instead, either the transfer will be treated as taking place at market value, or, if the asset has not been used exclusively for the purposes of a foreign permanent establishment, CTA09/S848A will apply to determine the transfer value (see INTM283000+).

Transactions affected

Tax-neutral treatment only applies to the transfer of such an asset. Not all transactions realising an asset within the rules described in CIRD13210 onwards involve the transfer of an asset. See CIRD40350 for more details.

Novations of contracts

An Intangible Fixed Asset may subsist in the form of contractual rights – for example, a licence to use intellectual property. The licensing of intangible fixed assets is accomplished by means of a licence agreement, being a legal instrument between the grantor and licensee which takes effect as a contract. Since such contracts generally comprise obligations as well as rights, it is not generally possible for the intangible fixed assets arising under such contracts to be transferred by means of a simple assignment. It is therefore in this context that the concept of “novation” arises.

‘Novation’ involves a three-way contract which extinguishes a contract and replaces it with another contract in which a third party takes up the rights and obligations which duplicate those of one of the original parties to the agreement.

For the purposes of CTA09/PART8, HMRC considers that the novation of a contract can be treated as a transfer of existing contractual rights (to which, for example, CTA09/S775 or CTA09/S818 might apply).

Whether the rights and obligations of the third party ‘duplicate’ those of one of the original parties to the agreement is a question of fact. Arrangements to novate a contract can only comprise a transfer where the terms of the new contract are substantially equivalent to the original contract. Arrangements not qualifying as a transfer might involve the grant/acquisition of new contractual rights (see also CIRD40350). HMRC officers should seek advice from BAI if there is any uncertainty.