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Degrouping: The Tax Implications Of Leaving A Corporation Tax Group

25 May 2011

The Finance Bill 2011 which will take effect this summer will introduce significant changes to the longstanding chargeable gains rules on degrouping charges for assets. In a recent amendment to the current Finance Bill, it will now be possible for taxpayers to elect for the new rules to apply to transactions carried out since 1 April 2011, rather than having to wait for Royal Assent. Taxand UK looks at what the new rules will mean for multinationals.

Under the new rules, where a degrouping charge arises due to a sale of shares, this charge would be treated as additional proceeds received from the share disposal. If that disposal is exempt from tax as a result of the availability of the substantial shareholding exemption (SSE), then that additional consideration attributed to the degrouping charge will also be exempt. Put in the broadest of terms, where a trading group disposes of a trading subsidiary, degrouping charges should no longer be an issue.

There are, however, a couple of traps for the unwary:

  • The new rule set out above applies where there is a sale of shares. When a company leaves a group simply because it has issued new shares to a shareholder outside of its group, the old rules will continue to apply
  • There are no equivalent amendments to the associated degrouping provisions in the intangibles regime, which means that if those assets subject to the charge include intangibles that were acquired post April 2002 (in particular, "new goodwill"), then adverse consequences could still arise.

Taxand's Take

The new rules, which have been introduced in the name of simplification, represent welcome reform. Nevertheless, their application remains complex and the fact that degrouping charges may still be on point regarding "new" intangibles, including goodwill, means that adequate due diligence remains as important as ever.

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Your Taxand contacts for further queries are:
Ian Fleming
T. +44 207 663 0425

Jonathan Hornby
T. +44 207 715 5255

Chris Ho, Senior Associate, is a co-author of this story

Taxand's Take Author