2.16 As with so much else in a tax covenant, resistance from the Seller’s advisers may be indicative of a lack of understanding rather than reflecting any deeper technical concerns.
3 Degrouping Charges
3.1 There are various degrouping charges that can arise at the point of exchange of unconditional contracts for the sale of shares in the Company. They are a matter of major concern to the Buyer: they are charged on the target Company, they arise from transactions in the periods prior to Completion and the Buyer may therefore be unaware of them; finally there will, almost certainly, be no liability included for such tax costs in the accounts of the Company. This is therefore a perfect cocktail for unforeseen tax liabilities. 3.2 If a company receives a capital asset from another company in the seller group, that transfer will initially be made on the basis of no gain, no loss, under the provisions of Section 171, TCGA, as explained in chapter 2. Therefore a building with a base cost of say 100 and a current market value of 500 is transferred from subsidiary B to subsidiary A within a group at its cost plus indexation for the purposes of capital gains tax. There is therefore no tax payable on such an intragroup transfer. However, if subsidiary A then leaves that group within 6 years of that transfer, a tax charge crystallises, under the provisions of Section 179, TCGA at the point of exit of company A from the group. 3.3 As an example, Stowupland Properties Limited owns a number of different commercial buildings which it has held for many years. The company receives an offer for one of the buildings in Botesdale. The building has a base cost plus indexation of £100,000, and £250,000 has been offered as the purchase price. Stowupland Properties Limited transfers the building into a dormant subsidiary undertaking, Botesdale Limited, and then sells the shares in Botesdale Limited to the buyer. 3.4 Section 179 would come into play in the above transaction and Botesdale Limited would be taxed on the assumption that it had sold the property and immediately reacquired it. Rather counter-intuitively it is Botesdale Limited, the recipient company, that would be taxed in respect of this intra-group transfer. This is achieved by a deemed transaction, rather than an actual transaction. Under the provisions of Section 179(3) Botesdale Limited is deemed to have sold the property and immediately reacquired it, at the time when the property was transferred to it. The effect is that Section 171 is disapplied.
3.5 As previously noted, it may be helpful to think of Section 179 as applying if an attempt is made to “smuggle” a capital asset out of a group.
3.6 It is clearly the act of the sale of the subsidiary outside the group which crystallises this Section 179 charge. Under capital gains tax the point of crystallisation is the exchange of unconditional contracts, or the satisfaction of the last condition on a conditional contract. It is most common for exchange and completion to take place at the same
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