Corporation Tax, Chargeable Gains, and Intangible Assets Notes

Session 10: Corporation Tax, Chargeable Gains, and Intangible Assets

10.0 Session Introduction

10.1 Company Chargeable Gains Recap (Self-Directed Online Learning)

• Disposals of chargeable assets by companies are calculated similarly to individuals.

• Key Difference: Indexation allowance is available to companies as a relief against inflation, but only up to 31 December 2017.

• Net gains are included in the taxable total profits computation.

• Gains are subject to corporation tax at the prevailing rate (19%/25% less marginal relief).

  • Adjusted trading profit: £X
  • Property income: £X
  • Chargeable gain: £X
  • Taxable total profits: £X

Company Chargeable Gains Proforma – FY 2023 Onwards

• Proceeds/deemed proceeds: £X
• Less: costs of disposal: (£X)
• Net proceeds: £X
• Less: allowable costs or March 1982 market value: (£X)
• Less: enhancement expenditure: (£X)
• Unindexed gain: £X
• Less: indexation allowance (up to 31/12/17): (£X)
• Less: capital losses: (£X)
• Net gain: £X
• Corporation tax thereon at 19%/25% less marginal Relief/25%: £X

Indexation Allowance Calculation

• $RD$ = Retail Price Index (“RPI”) in month of disposal or December 2017 (if later)
• $RI$ = RPI in month of relevant cost/enhancement expenditure
• If a disposal takes place after 31 December 2017, use the $RD$ for the month of December 2017 (= 278.1)
• Indexation allowance cannot create or augment a loss
• Formula: $(\frac{RD-RI}{RI})$ (round to 3 d.p.) x allowable costs/enhancement expenditure

Example Question

• A company bought an investment property on 2 March 1984 for £30,000. It spent £20,000 upgrading the property in January 2019 and sold the property on 14 December 2024 for £200,000. Legal fees and estate agents’ fees of £8,000 were incurred in respect of the disposal. Calculate the chargeable gain arising in the company on the disposal of the property.

Solution

• Proceeds: £200,000

• Less: costs of disposal: (£8,000)

• Net proceeds: £192,000

• Less: allowable cost: (£30,000)

• Less: enhancement expenditure: (£20,000)

• Unindexed gain: £142,000

• Date of disposal: 14 December 2024

• Date of acquisition: 2 March 1984

• Indexation allowance calculation:

  • $\frac{278.1 – 87.5}{87.5} = 2.178285 = 2.179 \times £30,000 = £65,370$
  • RD = RPI for December 2017 = 278.1
  • RI = RPI for March 1984 = 87.5
  • No indexation allowance is available in respect of the enhancement expenditure as it was incurred after 31 December 2017

• Less: indexation allowance: (£65,370)

• Gain: £76,630

Capital Losses of Companies

• Capital losses may only be set off against capital gains in the same company.
• Must claim against gains in the current year and cannot carry back.
• Net losses must be carried forward until there is a gain.
• Subject to loss restriction rule and group deductions allowance.

Rollover Relief for Companies

• Similar to rollover relief for individuals, except the gain after indexation is what is rolled over.
• Claim must be made from later of 4 years after end of accounting period of disposal and 4 years after end of accounting period of reinvestment.

Company Chargeable Gains Proforma – FY 2023 Onwards (Including Rollover Relief)

• Proceeds/deemed proceeds: £X
• Less: costs of disposal: (£X)
• Net proceeds: £X
• Less: allowable costs or March 1982 market value: (£X)
• Less: enhancement expenditure: (£X)
• Unindexed gain: £X
• Less: indexation allowance (up to 31/12/17): (£X)
• Less: rollover relief: (£X)
• Less: capital losses: (£X)
• Net gain: £X

10.2 Company Chargeable Gains Territoriality

UK Tax Resident Companies

• Are liable to UK corporation tax on chargeable gains on assets situated both in the UK and elsewhere (i.e., on a worldwide basis).
• May also pay overseas tax on foreign chargeable asset disposals. Double taxation relief is available.

Non-UK Tax Resident Companies

• Are liable to UK corporation tax on chargeable gains on assets situated in the UK used for its trade through a UK permanent establishment.
• May also pay overseas tax on UK chargeable asset disposals. Double taxation relief is not available in the UK.

Examples

• UK resident company: Sporting Limited is a UK tax resident company. During its 2024 accounting period, the company sold a commercial investment property in Belfast and one in Dublin making a gain on each. As the company is UK tax resident, UK corporation tax is payable on both gains.
• Non-UK tax resident company: Destiny Limited is an Irish tax resident company with a branch in Belfast. During its 2024 accounting period, the company sold the Belfast trading property. The company also sold a property in Dublin used in the UK trade. Even though the company is non-UK tax resident, corporation tax is payable on the Belfast gain. However, no UK CT is payable on the Dublin gain as the property is not a UK situs asset.

10.3.1 CGT Groups of Companies - Part 1

Definition of Capital Gains Group

• Consider ordinary shares only.

• A company can only be in one capital gains group.

• A CGT group can include non-resident companies, but be careful when applying reliefs.

• Definition: Companies are in a capital gains group where:

  • At each level, there is direct 75% ownership, and
  • The top company has an effective interest of at least 51% (indirect) in the group companies.

Capital Gains Group - Example

• Green Ltd owns 80% of Purple Ltd, which owns 80% of Blue Ltd and 90% of Orange Ltd. Orange Ltd owns 75% of Teal Ltd and 60% of Pink Ltd.
• What are the members of the capital gains group?
• What are the loss relief groups?

Analysis

• Principal company: Green Ltd
• Effective ownership by Green Ltd of Orange Ltd = 80% x 90% = 72%
• Effective ownership by Green Ltd of Teal Ltd = 80% x 90% x 75% = 54%
• Effective ownership by Green Ltd of Pink Ltd = 80% x 90% x 60% = 43.2%
• Green Ltd, Purple Ltd, Orange, and Teal Ltd are members of the capital gains group.
  *Green, Purple and Blue - 80% direct ownership.
  *Purple and Orange - 90% direct ownership.
  *Orange and Teal - 75% direct ownership.

Section 171 TCGA 1992

• Chargeable assets transfer between CG group companies at a value which results in no gain/no loss - this is automatic.
• This means no corporation tax is payable by the company transferring the asset.
• The base cost of the asset for the transferee is the original base cost + any indexation allowance to time of transfer.
• Transfers to and from a non-UK tax resident CG group company occur at no gain/loss where the asset is used in a UK permanent establishment s171.

Section 171A TCGA 1992 Election

• Members of a capital gains group can elect to transfer a current-year chargeable gain, or allowable loss, in whole or in part between them.
• A joint election is required.
• The chargeable gain or allowable loss is deemed to belong to the transferee company.

Benefits of Section 171A TCGA 1992 Election

• Transfer a capital gain to a company with a lower corporation tax rate.
• Transfer a capital loss to a company with a capital gain.
• Transfer a capital gain to a CG group member with a current-year or brought-forward capital/trading loss.
• Avoid companies being unnecessarily exposed to the installment payment rules.

Disposal of Assets Outside the Group

• If there is a disposal of an asset by a member of a capital gains group to a “person” outside the group, the gain or loss on disposal is calculated as normal.

• If the asset being sold was acquired previously via a Section 171 transfer:

  • Indexation allowance (if available) is calculated on this base cost (original cost + indexation allowance to the time of the group transfer) i.e., the acquisition date is treated as being the date of the intergroup transfer.

10.3.2 CGT Groups of Companies - Part 2

Section 171A TCGA 1992 Election Question

• Jones Limited owns 100% of Jenson Limited which in turn owns 75% of Jasper Limited. The companies are all UK tax resident and each prepares accounts to 31 March. Jasper Limited has a capital loss carried forward of £20,000 as at 1 April 2024.
• Calculate the corporation tax liability of each company for the 12-month accounting period ended 31 March 2025, assuming any beneficial election is made.

Section 171A TCGA 1992 Election Solution

• A Section 171A TCGA 1992 election is undertaken to transfer the whole gain from Jones Limited to Jasper Limited. This enables the capital loss brought forward in Jasper Limited to be fully used and reduces the chargeable gain to £10,000. The remaining £10,000 is subject to corporation tax at 19% as Jasper Limited’s profits are below the lower limit of £16,667 , thus saving £5,600 corporation tax overall.

Rollover Relief

• A CGT group is treated as a single unit for the purposes of rollover relief.
• A disposal by one company can be rolled over against a qualifying investment made by another group company within the qualifying period.
• A joint claim is required 4 years.

Capital gains group – summary of potential reliefs

*Section 171 Transfers of chargeable assets within a CGT group are on a no gain/no loss basis
*Group rollover relief: A CGT group is treated as single unit for the purposes of rollover relief
*Section 171A Transfers of chargeable gains or allowable losses within a CGT group via election

Degrouping Charges

• If the transferee leaves the group in < 6 years and still owns an asset transferred under no gain/no loss from a CG group member – this triggers a degrouping charge.
• Degrouping charge = the gain/loss that would have arisen if that asset had been sold at market value at the date of the Section 171 nil gain, nil loss transfer
• The company selling the shares, and not the departing company, is assessed to Corporation Tax on the degrouping gain in the relevant accounting period.
• The disposal proceeds received by the vendor company for the shares are increased by the degrouping gain.

Loss Buying

• A CG group might acquire a company that has capital losses brought forward, known as pre-entry losses.

• Pre-entry capital losses are restricted – anti-avoidance to prevent “loss buying”.

• Realised pre-entry losses can only be used against:

  • Gains made by the company before joining the group
  • Gains on assets it owns when it joins the group
  • Gains on assets acquired from a third party, providing the asset is used for its own trade

Capital gains group – summary of anti- avoidance

*Degrouping charges: Triggers original gain if CG group member leaves group < 6 years after previous Section 171 transfer and still owns the asset, though SSE may exempt
*Loss-buying: Prevents acquisition of companies with capital losses carried forward by restricting use of pre-entry losses

10.4 The Substantial Shareholdings Exemption

Substantial Shareholdings Exemption (“SSE”)

• When a company sells shares in another company, this is the disposal of a chargeable asset on which corporation tax may arise.
• There is an exemption from corporation tax for any gain arising when a company disposes of the whole or any part of a substantial shareholding in a trading company if certain conditions are met.
• Capital gains – exempt
• Capital losses – not allowable
• Impact: There must be a “substantial shareholding” in a trading company or the holding company of a trading group

The Substantial Shareholding Requirement

• The investor company must have held a “substantial shareholding” in the company whose shares are being sold throughout a continuous 12-month period in the 6 years before the disposal.

  • A shareholding is substantial if the investor company:

    • Owns at least 10% of the ordinary share capital
    • Is beneficially to at least 10% of the assets on a winding up, and
    • Is beneficially to at least 10% of the profits available for distribution

The Trading Company Requirement

• The company being sold must be a trading company or the holding company of a trading group
• A trading company or the holding company of a trading group = a company/group carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities.
• “Substantial” is generally taken to be 20% and can relate to turnover, assets or management time.
• This is the same trading company test used for gift relief and business asset disposal relief.
• The investor company does not have to be a trading company
  The investee company: *must be a trading company/holding company of a trading group) for a continuous 12 month period before disposal *does not need to be a trading company after disposal except where exceptions apply

10.5.1 Intangible Fixed Assets – Part 1

Intangible Fixed Assets (“IFAs”)

• IFAs, a company’s “intellectual property”, are subject to a special CT regime since 1 April 2002 – the Corporate Intangibles Regime (“CIR”).
• This includes items such as patents, copyrights, trademarks, and goodwill.
• The CIR applies to expenditure on the creation, acquisition, and enhancement of IFAs on or after 1 April 2002.
• Broadly, the tax treatment follows the accounting treatment – exception → major restrictions for goodwill.
• Expenditure is a ‘debit’ and income is a ‘credit’ → taxed as trading or non-trading profits depending on the purpose for which the intangible fixed asset is held.

Relief for CIR IFAs

• Companies generally obtain corporation tax relief for intangible fixed assets (special rules apply to goodwill) falling within the CIR as follows:-
  • Equal to the accounting amortisation charged in the accounts, as long as this is in accordance with UK GAAP
  • Via a fixed rate allowance of 4% per annum, effectively writing-off the IFA over 25 years, (an election is required)
• An election should only be entered into where the 4% election would accelerate relief

Impact on CT Computation

*Aidback the accounting amortisation deduct 4% p.a.

Disposal of CIR IFAs

• Gains on sale of CIR IFAs are subject to corporation tax and are treated as either a trading profit/non-trading rather than as a chargeable gain (non-CIR IFAs).
• Profit = Proceeds - tax written down value
• The disposal of a CIR IFA can be rolled over against expenditure on new CIR IFAs – with relief restricted to extent proceeds are reinvested
• The maximum profit rolled over is proceeds less original cost, not tax written down value

CT Relief for Acquired Goodwill

*No relief if acquired from a related party
*”Related party” = a participator or associate of a participator in a close company

Goodwill Acquired On/After 1 April 2019

• Companies that acquire goodwill on or after 1 April 2019 only receive relief for this goodwill where:

  • They acquire the goodwill as part of a business; and
  • Other qualifying intellectual property assets (“IP”) are also acquired as part of the same acquisition
  • Qualifying IP assets = patents, registered designs, copyright and design rights
  • If no qualifying IP assets are acquired, then no relief is available for goodwill

• Relief is given at 6.5% per annum on the lower of:-

  • The cost of the goodwill; or
  • Six times the amount of other qualifying IP

• Addback any amortisation deduct 6.5% amount

10.5.2 Intangible Fixed Assets – Part 2

CIR IFA Group

• An intangibles group can also exist under the CIR.
• The definition is identical to that for capital gains groups.
• Non-UK tax resident companies can be included within an intangibles group and avail of its reliefs if the company has a branch or agency in the UK.

Section 775 CTA 2009

• CIR IFAs automatically transfer between group members on a tax-neutral basis i.e., the transferee inherits the transferor’s tax written down value at the date of transfer
• An intangibles group is treated as single unit for the purposes of intangibles rollover relief

Intangibles Groups – Degrouping Charges

• If the transferee leaves the group in < 6 years and still owns an intangible asset transferred on a tax neutral basis from an intangibles group member – this triggers a degrouping charge.
• Degrouping charge = the profit/loss that would have arisen if the intangible had been sold at market value at the date of the transfer
• The departing company and not the company selling the shares, is assessed to Corporation Tax on the degrouping charge in the relevant accounting period * However, once again, if the SSE is available on the share disposal, the degrouping charge is also exempt
• Triggers original profit if intangibles group member leaves group < 6 years after previous tax neutral transfer and still owns the asset, though SSE may exempt

Intangibles groups – summary of anti-avoidance

Summary of reliefs/exemptions for companies

*Reliefs for companies: CGT rollover relief, Intangible assets rollover relief ,CGT group reliefs, Intangibles group reliefs, Indexation allowance Negligible value claims and The SSE

Recap:

*Companies pay CT on disposals of chargeable assets. Indexation allowance provides relief for inflation – but only up to 31 December 2017 *Territoriality:UK tax resident company = subject to UK corporation tax on worldwide disposals Non-UK tax resident company = subject to UK corporation tax on disposals of UK assets used in a UK permanent establishment. Relief for corporate capital losses. Rollover relief may be available for companies, after any IA

• The SSE:Automatic exemption from corporation tax on chargeable gains on the disposal of shares in a trading company, if conditions met
  The Corporate Intangibles Regime: corporation tax relief for intangibles. Special rules for goodwill,
  CT on disposal of intangibles – rollover? Intangibles groups – reliefs and degrouping charges
  Capital gains groups
  Benefits – S171 automatic, S171A election, and rollover relief Anti-avoidance – loss buying and degrouping\n