CAPITAL GAINS OF COMPANIES: SALES OF SUBSIDIARIES

A tax loophole where groups of companies can reduce or eliminate
capital gains charged on the sales of subsidiaries will be closed
announced the Chancellor today.

Existing anti-avoidance legislation allows for an adjustment to be
made to the capital gain arising on the sale of a subsidiary company
where value has been stripped out of that company in a non-taxable
form. A way around this protection has been devised involving a sale
to an offshore company within the world-wide group prior to the
onward sale outside the group. The anti- avoidance legislation will
be extended to cover this situation.

The extension to the existing anti-avoidance legislation will apply
to groups where the transfer to which the anti-avoidance legislation
applies takes place on or after today. It is expected to yield around
#130 million a year and to prevent a greater loss of tax in the
future.

DETAILS

1. Existing anti-avoidance legislation provides protection against
schemes, commonly known as drain-out dividend schemes, to reduce the
capital gain on the sale of a UK subsidiary company.

2. Typically, these schemes involve the stripping out of value from
the company to be sold by the payment of a dividend prior to the sale
outside the group of companies. The anti-avoidance legislation allows
the gain to be computed as if the value had not been stripped out.

3. This legislation is being side-stepped by a series of transactions
which involve the stripping out of value from the UK subsidiary
company to be sold, the transfer of that company to a non-resident
subsidiary within the same world- wide group, prior to its onward
sale to the third party purchaser. Safeguards built into the existing
legislation mean that the anti-avoidance legislation cannot apply on
the sale to the non-resident subsidiary or on the onward sale outside
the group.

4. The anti-avoidance legislation will be extended so that it is
triggered when there has been a disposal that would normally fall
within the anti-avoidance legislation, except that the UK subsidiary
company does not leave the group, but at some time within 6 years of
that disposal the company is sold outside the group. The effect will
be to permit adjustment of the gain that would have arisen on the
transfer to the non-resident subsidiary, had value not been stripped
out of the UK subsidiary company. The increased gain will be charged
at the time of the sale of the UK subsidiary company outside the
group, on the company which made the transfer to the non-resident
company, or the parent company of the group if that company no longer
exists.

5. The extension to the present rules will have effect where the
transfer to the non-resident subsidiary takes place on or after
today.

NOTES FOR EDITORS

1. The anti-avoidance legislation in respect of value shifting
transactions is at sections 30 to 34 Taxation of Chargeable Gains Act
1992.

2. It is not possible to gauge exactly the extent to which this
device has been used, but it has been seen in a number of cases where
the amount of tax at stake is very substantial. Estimates of tax
yield, which are based on the expected amount of tax on disposals of
subsidiaries by companies, show this exploitation would allow
significant avoidance of tax.

3. The yield from the additional protection provided by this change
is estimated to be #30 million in 1999/00 and #130 million in a full
year.

INLAND REVENUE PRESS OFFICE
Media enquiries to: 0171 438 6692/6706/7327
(Out of hours:0860 359544)

Non-media enquiries to: 0171 438 6420/6425
(Office hours only)

Inland Revenue information is on the Internet:
www.inlandrevenue.gov.uk

# = pounds sterling