10. Session 10

Question 1

Part A

  • B Ltd acquired a chargeable asset on 1 April 1990 for £100,000.

  • The asset was transferred to C Ltd in 2000 for £130,000, when its market value was £180,000.

  • Indexation factor from April 1990 to 2000 = 0.682.

  • On 1 December 2024, C Ltd sold the asset outside the group for £350,000.

  • Indexation factor from 2000 to December 2017 = 0.532.

  • Calculate the chargeable gain arising on the disposal of the asset on 1 December 2024.

Solution:

  • As the companies are members of a capital gains group, the transfer from B Ltd to C Ltd automatically took place under Section 171 TCGA 1992 at such a price as to give B Ltd no gain and no loss, i.e. £

    • Cost: £100,000

    • Indexation allowance April 1990 to 2000: 100,000 \times 0.682 = £68,200

    • Deemed proceeds: £100,000 + £68,200 = £168,200

  • When C Ltd sells the asset outside the group the base cost is therefore deemed to be £168,200.

    • Proceeds: £350,000

    • Less: base cost (£168,200)

    • £181,800

    • Less: Indexation allowance 2000 to December 2017: 168,200 \times 0.532 = £89,482

    • Chargeable gain: £181,800 - £89,482 = £92,318

Part B

  • D Ltd, a UK tax resident investment company, sold its wholly owned UK tax resident trading subsidiary, E Ltd on 15 April 2024 to an unconnected third party.

  • The shares in E Ltd were acquired in 2000.

  • Both companies prepare accounts to 31 March each year.

  • D Ltd purchased a building on 1 August 2000 for £180,000.

  • On 29 April 2018 the building was transferred to E Ltd for £230,000.

  • Its market value on the date of the transfer was £375,000.

  • Indexation factor August 2000 to December 2017 = 0.587.

  • On 1 April 2020, D Ltd also transferred a valuable patent to E Ltd.

  • The patent originally cost £250,000 when it was bought on 1 April 2018 and is being amortised over a 10-year period.

  • The tax written down value of the patent at the date of transfer in 2020 was £175,000 and its market value was £300,000.

  • E Ltd still owned the building and the patent transferred from D Ltd when it was sold on 15 April 2024.

  • Explain, with calculations, the tax implications which arise from the sale of the shares in E Ltd.

Solution:

  • When E Ltd leaves the group, the company still owns the building and patent which it acquired from D Ltd in the six years preceding E Ltd’s departure.

  • Building (chargeable asset):

    • A degrouping charge arises based on the gain which would have arisen but for the tax neutral inter-group transfer on 29 April 2018.

      • This is calculated as follows and is taxable on D Ltd:-

        • Proceeds – market value: £375,000

        • Less: Cost: £180,000

        • Indexation allowance August 2000 – December 2017 180,000 \times 0.587 = £105,660

        • (£285,660)

        • Chargeable gain – degrouping charge £375,000 - £285,660 = £89,340

  • Patent (corporate intangible):

    • A degrouping charge arises based on the profit which would have arisen but for the tax neutral inter-group on 1 April 2020. This is calculated as follows and is taxable on E Ltd:

      • Proceeds – market value: £300,000

      • Less: tax written down value: (£175,000)

      • Taxable profit – degrouping charge: £125,000

  • However, if the disposal of shares in E Ltd by D Ltd meets the conditions for the Substantial Shareholdings Exemption, no corporation tax will arise on the degrouping charges and the gain on the shares will automatically be exempt from corporation tax.

  • The disposal proceeds on the sale of E Ltd by D Ltd would effectively be increased by each of the above degrouping charges.

  • The following conditions must be met:

    • D Ltd must have held a substantial shareholding in the company sold (E Ltd) through-out a continuous period of at least 12 month period in the six years immediately prior to disposal. This test is met as the shares have been owned since 2000;

    • A substantial shareholding is defined as at least 10% of ordinary share capital in E Ltd (and equivalent amounts of entitlement to assets and profits available for distribution). This test is met as D Ltd held 100% of the shares;

    • E Ltd must be a trading company (or the holding company of a trading group) before disposal. This condition is met.

  • As the above conditions are met, the degrouping charges are exempt from corporation tax as SSE is automatically available where the relevant conditions are met.

  • E Ltd will continue to receive tax relief on the intangible as it did prior to degrouping and there is no change to the tax written down value at that time.

Question 2

  • Beta Ltd purchased a chargeable asset qualifying for rollover relief in June 1996 for £100,000.

  • In 2007 the company sold the chargeable asset for £275,000 (indexation factor June 1996 to 2007, 0.649), and spent £350,000 in the same year on a new qualifying chargeable asset for rollover relief, which it claimed.

  • The new chargeable asset was sold without replacement in January 2025 for £510,000 (indexation factor 2007 to December 2017 = 0.325).

  • Calculate the gain arising on the disposal in January 2025.

Solution:

  • Disposal - 2007

    • Proceeds: £275,000

    • Less: Base cost (£100,000)

    • £175,000

    • Less: Indexation allowance 0.649 \times £100,000 = (£64,900)

    • £110,100

    • Less: Rollover relief (£110,100)

    • Chargeable gain: Nil

  • Full rollover relief was available as the proceeds from disposal were fully reinvested in the new asset.

    • Cost of new asset: £350,000

    • Less: rollover relief: (£110,100)

    • Revised base cost: £239,900

  • Disposal - 2025

    • Proceeds: £510,000

    • Less: Base cost (£239,900)

    • £270,100

    • Less: Indexation allowance* 0.325 \times 239,900 = £(77,968)

    • Chargeable gain: £192,132

  • Indexation only available up to December 2017

Question 3

  • Red Limited (“RED”) is a UK incorporated and UK tax resident trading company which manufactures and sells paint and painting products.

  • RED has invested in numerous other companies which operate in the same market, in an attempt to increase market share.

  • The Finance Director of RED has decided that RED will dispose of the following investments as soon as possible:

    • 9% shareholding in ORANGE Limited (“ORANGE”), a trading company, acquired on 1 October 2009

    • 7% shareholding in BLUE Limited (“BLUE”). RED acquired an 18% shareholding in BLUE, a paint distribution trading company in June 2007. RED sold 11% of its 18% shareholding on 1 July 2021

    • 11% shareholding in PINK Inc (“PINK”), a US incorporated and tax resident trading company. RED acquired its 11% shareholding in April 2016.

  • State whether the Substantial Shareholdings Exemption (“SSE”) will be available to RED on the sale of each of the above investments, explaining your conclusion in each case.

Solution:

  • You should assume that each disposal takes place on 31 March 2025 and is to an unconnected purchaser.

    1. Orange Limited

      • The Substantial Shareholdings Exemption (“SSE”) is not available as Red Limited (“RED”) only held a 9% shareholding in Orange which is less than the 10% required for RED to hold a “substantial shareholding”, one of the conditions for the SSE to apply.

    2. Blue Limited

      • The SSE is available as the following conditions for SSE are all met hence the gain is exempt from corporation tax:-

        • BLUE is a trading company before the disposal by RED;

        • Even though the 7% shareholding in BLUE sold in March 2025 no longer constitutes a substantial shareholding, SSE is still available for disposals in the 5 years following the date on which RED sold 11% of its original 18% shareholding in Blue (i.e., the 5 years following 1 July 2021) as at least a 10% shareholding has been held for 12 months out of the last six years of ownership. Therefore, SSE is available on the basis that RED disposes of its shareholding in Blue prior to 1 July 2026 on 31 March 2025.

    3. Pink Limited

      • The SSE is available as the following conditions are all met:-

        • RED holds a substantial shareholding in Pink (11%);

        • Pink is a trading company before disposal by RED; and

        • RED held its shareholding in Pink for more than 12 months out of the previous six years.

      • There is no requirement that the investee company must be a UK tax resident company; however, the overseas tax implications must be addressed.

Question 4

  • RED Ltd owns 100% of BLACK Ltd.

  • RED Ltd transferred a shop building to BLACK Ltd on 30 September 2022.

  • The shop originally cost RED Ltd £165,000 (including purchase costs) in 2007.

  • The market value of the shop building at the date of transfer in 2022 was £480,000.

  • Indexation factor from 2007 to December 2017 is 0.262.

  • The market value of the shop on 23 March 2025 is £600,000.

  • Explain, with calculations, the tax implications which would arise if RED LTD were to sell BLACK Ltd on 23 March 2025.

Solution:

  • You should assume that BLACK Ltd would still own the building previously transferred to it by RED Ltd and that each company is UK tax resident.

  • On the sale of the shares in Black Ltd (“BLACK”), a degrouping charge arises based on the gain that would have arisen on the sale in September 2022 as BLACK) still owns this asset which was transferred tax neutrally in the previous six years.

  • The capital gain is calculated as if BLACK sold the shop for its market value at the date it was originally acquired from the group member, although the gain is deemed to arise in the period BLACK leaves the capital gains group and is chargeable on RED Ltd as additional proceeds on the BLACK share disposal.

  • The degrouping charge arising is as follows:

    • Proceeds – deemed MV £480,000

    • Less: Base cost (£165,000)

    • Less: Indexation allowance 0.262 \times £165,000 = (£43,230)

    • Chargeable gain – degrouping charge £271,770

  • A gain also arises on the disposal of the shares in BLACK. However, the availability of the Substantial Shareholdings Exemption (“SSE”) should be considered. If the conditions are met, the gain will automatically be exempt from corporation tax.

  • The disposal proceeds on the sale of the shares in BLACK will be increased by the degrouping charge. If the gain on the shares is exempt under the SSE, then the degrouping charge will also be exempt.

Question 5

  • Purple Limited (“PURPLE”) is a UK incorporated and tax resident trading company which manufactures and sells paint and painting products.

  • PURPLE has invested in numerous other companies in an attempt to increase market share and diversify.

  • The Finance Director of PURPLE has decided that PURPLE will dispose of the following investments as soon as possible:

    • 6% shareholding in BLACK Limited (“BLACK”) which was acquired in November 2017. WHITE Limited (“WHITE”), a 75% subsidiary of RED also holds a 5% shareholding in BLACK, which was acquired in November 2021. BLACK is a trading company and paint wholesaler

    • 15% shareholding in GREEN Limited (“GREEN”), a trading company, acquired on 1 August 2024

    • 12% shareholding in GREY Limited (“GREY”), a property investment company, acquired in 2014.

Solution:

  • State whether the Substantial Shareholdings Exemption will be available to PURPLE on the sale of each of the above investments, explaining your conclusion in each case. You should assume that each disposal takes place on 31 March 2025 and is to an unconnected purchaser.

    1. Black Limited

      • The substantial shareholdings exemption (“SSE”) is available as the following conditions are all met:-

        • Purple Limited has a substantial shareholding in Black Limited of 11% (6% + 5% = 11%); Purple Limited’s shareholding in Black Limited on its own does not constitute a substantial shareholding, as it is less than the required 10%. However as White Limited, another subsidiary of Purple Limited, also holds shares in Black Limited the shareholdings of Purple Limited and White Limited can be aggregated in order to determine whether the substantial shareholding requirement is satisfied. As Purple Limited controls White Limited, the shares in White Limited are treated as though they are held by Purple Limited (there is no need to calculate an indirect interest).

        • Black Limited is also a trading company before its disposal by Purple Limited and the shareholding was held for more than 12 months out of the previous six years.

    2. Green

      • The SSE is not available as RED has not held the shares throughout a 12-month period in the previous six years.

    3. Purple

      • The SSE is not available as Grey Limited is a property investment company. It is therefore neither a trading company, nor the holding company of a trading group immediately before the disposal.

Question 1, Part Two

Part A

Conditions to be met in order for a company to be a member of a capital gains group:

  • A capital gains group comprises the top (principal) company in the group and all of its 75% subsidiaries.

  • The principal company in the group does not need to be a UK resident company.

  • There must be a 75% ownership chain to maintain the group.

  • The group ends once the principal company does not have an effective > 50% interest in the subsidiary.

  • The 75% test need only be met in terms of beneficial ownership of ordinary share capital.

  • In addition to the ordinary share capital, the principal company must have a beneficial entitlement to more than 50 per cent of the subsidiary’s profits and assets.

  • A company cannot be a member of more than one capital gains group.

Companies that are members of a capital gains group:

  • All companies in the group are members of the same capital gains group.

Part B

Corporation Tax payable on the sale of Property A by SPINNY to the third party on 1 April 2024:

  • The initial transfer of the property in 2017 from CLEANY to SPINNY was between two members of the same capital gains group and was therefore automatically deemed to occur at consideration that would give rise to no gain / no loss for the transferring company under section 171 TCGA 1992.

    • Deemed proceeds: £447,544

    • Less: Cost (£344,000)

      • Indexation allowance 0.301 \times £344,000 = (£103,544)

  • Nil gain, nil loss transfer (base cost to SPINNY): 0

  • The gain arising on the sale of this property by SPINNY on 1 April 2024 is therefore as follow:

    • Proceeds on sale: £850,000

    • Less: base cost above: (£447,544)

      • Indexation 0.028 \times £447,544 = (£12,531)

    • Gain arising: £389,924

    • Corporation Tax @ 25\% = £97,481

Part C

Tax implications if SPINNY sells its shareholding in SUDSEY on 31 March 2025:

  • If SPINNY sells its shares in SUDSEY on 31 March 2025 which is before January 2026, a degrouping charge will arise as SUDSEY will be leaving the WHIRLY capital gains group and SUDSEY received an asset from a fellow member of the WHIRLY capital gains group in the six years prior to leaving the group and will be leaving the group when it still owns the asset.

  • This original transfer would automatically have been a no gain no loss transfer. The capital gain is calculated as if WHIRLEY sold the asset for its market value at the date it was transferred it to SUDSEY – although the gain is deemed to arise in the period SUDSEY leaves the capital gains group and is chargeable on SPINNY.

  • The degrouping charge which arises is as follows:

    • Deemed proceeds: £300,000

    • Less: Base cost (£100,000)

      • Indexation allowance 0.214 \times £100,000 = (£21,400)

    • Chargeable gain – degrouping charge £178,600

  • The disposal proceeds for SPINNY on the sale of the shares in SUDSEY will be increased by the degrouping charge.

  • The disposal of shares itself may be covered by the substantial shareholding exemption (“SSE”) which would mean that the degrouping charge will also be exempt from corporation tax. The relevant conditions for the SSE would need to be checked.

Question 2

START Year ended 31 March 2025 Corporation Tax Calculation

  • Profit before tax: £1,338,685

  • Addbacks:

    • Depreciation: £468,000

    • Client entertaining: £14,780

    • Employer's pension accrual: £22,150

    • Legal fees: £6,675

    • Sundry expenses: £7,310

    • Sundry expenses - NTLRD: £1,235

    • Repairs and maintenance: £8,000

    • 528,150

  • Deductions:

    • Amortisation of intangible fixed asset: £11,875

    • Interest income: £4,885

    • Profit on disposal of property: £280,050

    • Capital allowances: £318,500

    • (615,310)

  • Tax adjusted trading profit: £1,251,525

    • Plus 20% x £194,075 RDEC: £38,815

  • Revised tax adjusted trading profit: £1,290,340

Corporation Tax Computation

  • Tax adjusted trading profit: £1,290,340

  • Surplus non-trade loan relationship credits: £3,650

  • Chargeable gain: £120,037

  • Taxable total profits: £1,414,027

  • Corporation tax thereon at 25%: £353,507

  • Less: 20% RDEC: (£38,815)

  • Corporation tax liability: £314,692

Notes

1. Wages and salaries

  • As the holiday pay accrual was paid within 9 months and 1 day from 31 March 2025 it is deductible. The employer's pension accrual unpaid at year end is not deducible and thus £22,150 is added back.

2. R&D tax relief

  • Staff costs: £94,840

  • Subcontracted R&D: £28,535

  • Software: £15,400

  • Consumables: £55,300

  • Total qualifying costs: £194,075

  • Although START qualifies as an SME for R&D purposes as it has employees and annual turnover of less than €100M, the company can only claim relief under the merged R&D expenditure credit regime as it is not loss-making, hence a 20% RDEC is available on the above expenditure.

    • R&D staff: £69,250

    • Part time R&D staff: £8,700

    • Pension cost re R&D staff: £16,890

    • The wages and salaries for the employee partly engaged in R&D is time apportioned as only staffing costs incurred on R&D are included. Qualifying staff costs include contributions to pension funds paid by START for the benefit of R&D employees. The cost of staff who provide support to R&D staff do not qualify.

3. R&D tax relief - subcontracted R&D

  • As the sub-contractor is not a connected party only 65% of the payments made to them may be claimed. £43,900 \times 65\% = £28,535

  • A joint irrevocable election can be made for connected company treatment to apply. If the company is connected to the subcontractor or an election to be treated as connected is made, the company can claim SME R&D tax relief on the lower of:

    • the payment that it makes to the subcontractor; or

    • the relevant expenditure of the subcontractor, as long as the whole amount of the subcontract payment is brought into account in determining the subcontractor’s profit in accounts drawn up under GAAP within 12 months of the end of the claimant company’s accounting period for which the relief is claimed.

4. Depreciation & amortisation

  • Based on accounting treatment (8 years) £95,000 / 8 claimed in 2025 = £11,875

5. Tax fees

  • Tax fees are incurred wholly and exclusively (“W&E”) for the purpose of START's trade and thus deductible

6. Legal fees
*   Fee re buy back of shares is capital in nature and therefore not tax deductible: £4,175
*   Fee re employee tribunal is W&E and therefore deductible: £0
*   Fees in relation to the VAT enquiry are not tax deductible as not W&E in relation to the trade of Company: £2,500
7 Bank interest paid

  • Interest payable relates to workings capital requirements and thus the trade of the company and is therefore deductible as a trading expense.

Repairs and maintenance

  • The upgrade of the air-conditioning system and the new boiler are capital expenditure and thus are added back in the calculation of trading profits. It should be consider if capital allowances have been claimed in relation to this expenditure. The corporation tax computation assumes that the relevant capital allowances have been claimed in the total amount claimed of £318,500. Repairs are trading expenses and thus tax deductible.

LR pool

  • Bank interest received: £4,885

  • Less: HMRC CTSA interest payable: (£1,235)

  • £3,650

Chargeable gain on sale of property

  • Proceeds: £475,000

  • Less: costs of disposal: (£3,850)

  • Acquisition cost: (£235,000)

  • Indexation allowance 278.1.8 - 217.9 / 217.9 = 0.276 x £235,000: = (£64,860)

  • Indexation allowance 278.1 - 257.7 / 257.7 = 0.079 x £47,500: (£3,753)

  • Chargeable gain: £120,037

Question 3 Briefing Note

To: Tax Partner

From: Tax Senior

Date: March 2025

Subject: Purchase and disposal of intangible fixed assets

(i)

  • The disposal of the patent is a disposal under the intangible fixed asset rules. This means that a trading profit will arise on sale. This profit is calculated as per below at £110,000.

  • Under the corporate intangibles regime, part of this gain can be sheltered using intangibles rollover relief so long as the entire £200,000 proceeds of sale of the patent are re-invested in a qualifying intangible asset used in the company’s trade and the reinvestment takes place in the period 12 months before the disposal of the old intangible to three years after.

  • Partial intangibles rollover relief may also be possible if the entire proceeds are not reinvested.

  • A qualifying asset for these purposes would be the patent associated with the acquisition of the trade and assets of the WARP business.

  • As the proposed expenditure on patent is £240,000, full rollover relief is available on the sale of the patent.

  • The maximum trading profit rolled over is proceeds less original cost, not written down cost – i.e. £200,000 less £150,000 = £50,000

  • This will mean that a claim for rollover relief of £50,000 can be made.

  • The remaining taxable trading profit on the patent disposal of £60,000 (£110,000 less £50,000 rollover relief) will be subject to corporation tax of 25% in the accounting period ended 31 March 2025 – corporation tax of £15,000 will therefore arise.

    • Registered patent: £

      • Proceeds: 200,000

      • TWDV: (90,000)

    • Taxable trading profit arising: 110,000
      (ii)

  • The cost of the patent acquired for tax relief purposes will be £190,000 being its cost of £240,000 reduced by the £50,000 rollover relief claimed.

  • The tax cost of the patent on which the 4% fixed rate election can be made will be £190,000.

  • Therefore, the annual allowance on which tax relief will be available is therefore £7,600 (£190,000 \times 4\%).
    (iii)

  • If the full £200,000 proceeds received from the disposal of the old patent are not fully reinvested in qualifying corporate intangible assets, then rollover relief is partially available

  • If the new patent costs £170,000 the maximum rollover relief would be restricted to £20,000 (£170,000 reinvested less £150,000 original cost) and the £30,000 of the £200,000 proceeds received which were not re-invested will be immediately taxable.

  • In this case the taxable trading profit arising on the sale of the patent will be £90,000 (£110,000 less £20,000 rollover relief) which will be subject to corporation tax of 25% in the accounting period ended 31 March 2025 – corporation tax of £22,500 will arise

  • As £20,000 of rollover relief will be claimed, the base cost of the patent on which the 4% election would be available would be reduced to £150,000 (£170,000 less £20,000) – giving an annual allowance of £6,000

Question 4

Part b) i) Tax treatment of patent acquired by Hobbit Limited

  • The patent acquired by Hobbit will be treated as an IFA for corporation tax purposes under the Corporate Intangibles Regime as this regime applies to IFAs acquired, enhanced, or created on or after 1 April 2002 (the patent was acquired on 1 April 2025).

  • Companies generally obtain tax relief on expenditure on CIR IFAs (created or acquired) through their amortisation policy with special rules applying to expenditure on goodwill.

  • Amortisation per annum = £ 2 \text{ million} / 15 \text{ years} = £ 133,333 \text{ per annum}

  • The company can however, if it chooses to, elect for a 4% annual writing down election re the IFA, which effectively writes the IFA off over a period of 25 years, giving relief of as follows: Tax claim per annum = 2 million x 4% = £ 80,000.

  • It is therefore more tax efficient for Hobbit not to make the election but claim a deduction for accounting amortisation, as this will allow full relief to be obtained over a shorter 15year period.

  • If no election is made, relief for the full amount of the patent acquired will be obtained after 15 years, as opposed to 25 years is the 4% election is made.

Question 5

From: taxsenior@123.co.uk

To: taxpartner@123.co.uk

Subject: Client queries to consider

Date: 20 June 2025

Part a) Mr & Mrs Casey Companies are in the same capital gains group when one company owns at least 75% of the ordinary shares of another company or two companies are 75% owned by the same parent. This 75% definition is similar to the rules for group relief but, for group gains purposes, only 75% of the ordinary shares and not 75% of distributable profits or 75% of assets on a winding-up is required.
For a capital gains group, the direct relationship must be at least 75%, but the indirect relationship need only be above 50% i.e. at least 51%. In addition, for a capital gains group, a company can only be a member of one group. However, such groups can include non UK tax resident companies.
Applying this to the Mobile Homes Group - MHH, MHR, MHM and MHF are within a capital gains group as MHH holds directly at least 75% of the shares in each of these, and the indirect relationship between MHH and MHF is 60% (> 50%).
MH HOL is not in the capital gains group as although indirectly MHH holds 54% of MH HOL, the direct holding is only 60%, i.e. less than the required 75% direct ownership.
MHA is not in the capital gains group as while there is 75% direct ownership, MHH only holds 45% of MHA (80% x 75% x 75%) indirectly.

Question 6

From: taxsenior@AABCcharteredaccountants.co.uk

Subject: Client queries

Date: 21 June 2025

Tom Tower Draft memo:

To: Tom Tower

From: Tax Partner

Subject: Disposal of Trucks Limited

In March 2020, when TT Tractors transferred the warehouse to TT Trucks, it would have transferred on a no gain / no loss basis under section 171 TCGA 1992 (as the companies were within the same capital gains group).
However, if a company leaves a group within 6 years of an inter-group transfer, still owning the asset, a degrouping chargeable gain (or capital loss) is assessed on the company that is selling the shares, i.