Part 3 of 4
This is the Finance Act 2014 version of this article. It is relevant for candidates sitting the Paper P6 (UK) exam in the period 1 April 2015 to 30 June 2016. Candidates sitting Paper P6 (UK) after 30 June 2016 should refer to the Finance Act 2015 version of this article (to be published in 2016).
So far we have reviewed the definitions of a group relief group and a capital gains group, transfers at no gain, no loss and degrouping charges.
The remaining parts of this article continue to examine tax planning and other issues relating to capital gains groups. This part looks at the election to transfer a chargeable gain or allowable loss to another group company, rollover relief and pre-entry capital losses.
The election to transfer a chargeable gain or allowable loss to another group company
This election is a tax planning opportunity and something that you need to watch out for in exam questions. It enables the whole or part of a chargeable gain or allowable loss realised in the current period to be transferred from one group company to another. The availability of this election means that it does not matter which company in the group sells a particular asset. The gain arising, or any part of it, can be transferred to another company, to take advantage of that company’s capital losses or lower rate of corporation tax. Similarly, the whole or part of any allowable loss can be transferred to another group company if desired.
When minimising the corporation tax liability of a group of companies, in addition to dealing with group relief, you must recognise that any chargeable gains or allowable losses can be transferred in whole or in part to any of the group companies. When transferring a chargeable gain, your thinking should be the opposite of group relief such that the gain should be transferred to the company paying tax at the lowest rate. Take care, however, as the chargeable gain will increase the company’s profits and may, therefore, change its tax rate.
The companies in a gains group are treated as a single entity for the purposes of rollover relief. This means that the gain on a qualifying business asset sold by a company in a gains group can be rolled over when a qualifying business asset is purchased by any company within the gains group within the qualifying period.
Pre-entry capital losses
In addition to the possibility of degrouping charges, you may need to point out to the purchaser of a company that restrictions apply to the use of its pre-entry capital losses. Pre-entry capital losses are the capital losses that the target company is carrying forward at the time it is acquired.
Pre-entry capital losses can only be used against gains arising on:
- assets sold by the target company before it is acquired, or
- assets owned by the target company at the time of acquisition, or
- assets subsequently purchased by the target company, from non-group companies, for use in its trade.
The effect of this rule is that the group of companies acquiring the target company cannot use the company’s pre-entry capital losses to relieve gains on group assets.
The ability to transfer any amount of a chargeable gain or allowable capital loss from one company in a gains group to another means that great care must be taken when advising a group of companies on its tax position. Take the time necessary to identify all of the available possibilities before you try to reach a decision on the strategy to be adopted.
Note: Corporation tax issues are considered in two further articles:
- Corporation tax for Paper P6 (UK)
- Corporation tax – Group relief for Paper P6 (UK)
Written by a member of the Paper P6 examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The author and the ACCA expressly disclaims all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.