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New Consultation Document on Simplification of Capital Gains Rules for Groups

On 22 February, HMT published a further consultation document - including draft legislation - on the simplification of capital gains rules for groups of companies.  Comments are invited by 17 May 2010 with a view to legislating at the earliest practical opportunity.

The main proposals are summarised below.  With the possible exception of the proposal to replace the value shifting rules with a targeted anti-avoidance rule ('TAAR'), they represent a welcome simplification and relaxation of the CGT environment for groups.  

Capital losses after a change in ownership

Sch 7A TCGA would be amended so as to apply only to losses realised before the change in ownership occurred.  As a result, it would no longer be necessary to apportion losses on pre-entry assets.  In a further relaxation, losses that are caught by Sch 7A could be used against gains arising on assets used in the same business that the company conducted before joining the group rather than, as now, only against gains on assets used in the same trade.  The complex rules for identifying the relevant group (para 9) would also be repealed and replaced by a rule that, once a loss has become subject to restriction under Sch 7A, the same restriction continues to apply should the company subsequently join another group (reflecting the decisions in favour of HMRC in Revenue & Customs Commissioners vs Prizedome Ltd and Limitgood Ltd [2009] STC 980).

Value shifting and depreciatory transactions

ss31-34 TCGA would be repealed and replaced by a TAAR which would apply to make a just and reasonable adjustment to the consideration for a sale of shares where arrangements had been made to materially reduce the value of those shares (or a relevant asset) and one of the main purposes of those arrangements was to obtain a corporation tax advantage for the disposing company or any other person.  As with the existing value shifting rules, this TAAR would apply without time limit but, in a significant relaxation, the depreciatory transactions rules would also be amended so as to apply only to depreciatory transactions taking place within the period of 6 years ending with the disposal.

Degrouping charges

Extensive amendments to s179 TCGA are proposed.  A degrouping gain (or loss) would instead result in an adjustment to the chargeable gain (or allowable loss) that arises on the share disposal.  As a consequence, any exemption or relief that might apply to the share disposal, such as the SSE, would also apply to the degrouping charge.  The degrouping gain (or loss) would be reallocable via s171A and ss179A & B would be repealed.  The associated companies exception (s179(2)) would be amended so as to apply only where two companies are part of the same sub-group at all times from when the asset is transferred until immediately after they leave the original group, reflecting the decision in favour of HMRC in Johnston Publishing (North) Ltd v Revenue and Customs Commissioners [2008] STC 3116 (the intangible assets degourping charge would be similarly amended).  A technical amendment would also be made so as to ensure that a degrouping charge can only arise in respect of an asset transferred between two companies at a time when both are members of the same group.

New s179ZA would be introduced permitting a claim for a just and reasonable reduction of the degrouping charge to be made where there is economic double taxation, for example, because the degrouping charge and the gain on sale of the shares represent the same economic profit.

The SSE would be amended to allow the exemptions to apply when trading activities are placed within a newly incorporated group company which is then sold out of a trading group, to the benefit of groups that have various trading activities conducted within single companies.

If you have any comments or feedback on the consultation document or draft legislation, please contact Iain Kerr and Joel Phillips by 10 May 2010.

For more information please contact Iain Kerr | 020 7311 5621 or Joel Phillips | 020 7694 2784.

© 2010 KPMG LLP, a UK limited liability partnership, is a subsidiary of KPMG Europe LLP and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative, a Swiss entity. All rights reserved.

KPMG International Cooperative ("KPMG International") is a Swiss entity. Member firms of the KPMG network of independent firms are affiliated with KPMG International. KPMG International provides no client services. No member firm has any authority to obligate or bind KPMG International or any other member firm vis-à-vis third parties, nor does KPMG International have any such authority to obligate or bind any member firm.