Finance Bill 2002: EXPLANATORY NOTE
CLAUSE 41: REALLOCATION WITHIN GROUP OF GAIN OR LOSS ACCRUING UNDER SECTION 179
SUMMARY
1. Clause 41 introduces section 179A into the Taxation of Chargeable Gains Act 1992 (TCGA). Section 179A enables all or part of a gain or loss that arises by virtue of section 179 of the TCGA (the degrouping charge) to a company leaving a group to be reallocated to one or more other members of that group.
DETAILS OF THE CLAUSE
2. Subsection (1) inserts section 179A into the TCGA.
Section 179A TCGA
3. Subsection (1) provides that section 179A applies where a chargeable gain or allowable loss arises to a company (called ?company A? in what follows) as a result of the degrouping charge in section 179 TCGA.
4. Subsection (2) defines ?time of accrual? for the purposes of the section. In most cases it is the time at which the gain or loss arises, but in cases to which subsection (4) applies it is the time immediately before the gain or loss arises.
5. Subsections (3) and (4)(a), when taken together, apply to cases that fall within section 179(3), which covers the majority of cases in which a company leaves a group. They provide, if certain requirements are met, for the gain or loss (or any part of it) to be treated as having arisen not to company A but to another company (called ?company C? in what follows) which is a member of the same group as company A at the time of accrual. The first requirement is that companies A and C must make a joint election. The second is that the three conditions set out in subsections (6) to (8) of section 179A must be satisfied.
6. Subsections (3) and (4)(b), when taken together, apply to cases that fall within section 179(6), which covers the situation where a company leaves a group as a result of the principal company of that group being taken over by another company. They make the same provision and contain the same requirements as subsections (3) and (4)(a), except that company C must, at the time of accrual, be a member of the group which resulted from the take-over.
7. Subsection (5) provides that where two or more elections are made (companies C and A, D and A etc) the total amount of gain or loss reallocated cannot exceed the gain or loss that arose to company A in the first place.
8. Subsections (6) to (8) contain the conditions referred to in subsections (3) and (4): company C must, at the time of accrual, be resident in the UK or own assets that are within the scope of UK corporation tax on chargeable gains; neither company A nor company C can be a qualifying friendly society at that time; nor can company C be an investment trust, a venture capital trust or a dual resident investing company at that time.
9. Subsection (9) treats a gain or loss reallocated under section 179A to a company which is not resident in the UK as arising in respect of a ?chargeable asset? (see paragraph 12 below) held by the company. The purpose of this is to ensure that the gain or loss remains within the scope of UK corporation tax on chargeable gains.
10. Subsection (10) sets the time limit for an election as two years after the end of the accounting period of company A in which the time of accrual occurred.
11. Subsection (11) provides for any payment from company C to company A, or vice versa, which is made in connection with the election to be disregarded for corporation tax purposes, provided the payment does not exceed the amount of the chargeable gain or loss.
12. Subsection (12) defines a ?chargeable asset? for these purposes. This relates to non-UK resident companies which trade in the UK through a branch or agency. An asset is a ?chargeable asset? in relation to such a company if any chargeable gain arising on the disposal of the asset would by virtue of section 10(3) TCGA form part of its chargeable profits for UK corporation tax purposes.
13. Subsections (2) and (3) of the clause make consequential amendments. The effect of the first of these is to modify the definition of ?chargeable asset? in section 179A (see paragraph 12 above) in relation to overseas life insurance companies. The second inserts a new provision in section 97(1) of the Inheritance Tax Act 1984 to cater for circumstances where an election made under the new section 179A gives rise to a transfer of value out of a close company which is a member of a group.
14. Subsection (4) of the clause sets out the commencement provision. In particular, the new section 179A has effect for degrouping events taking place on or after 1 April 2002.
BACKGROUND NOTE
15. This measure is introduced as part of the package of corporation tax reforms containing the exemption regime for substantial shareholdings introduced by Clause 43 and Schedule 8 to this Bill. A draft clause was published for comment at the time of the Pre-Budget Report in November 2001 as part of the substantial shareholdings consultation process. A further draft clause was published on 26th March reflecting the outcome of the consultation.