Is a transfer between group companies really tax free? (2024)

COMPANY TAXES - 26.03.2018

One of your company clients wants to separate its valuable assets (especially the trading premises) from the trade by transferring them to a holding company to protect them from potential claims. Are there any hidden tax consequences you need to look out for?

Separation

It often makes sense for your clients to separate ownership of the valuable key assets of a business from the trade, for example in industries where there is a higher risk of financial claims being made relating to trading activities. Inserting a holding company to own the assets, with the trade operated through a subsidiary can offer protection in the event of such claims. Your client will need to consider all the potential tax consequences if they are considering restructuring in this way.

Corporation tax

Where a parent company has more than 75% ownership of its subsidiary companies (by reference to ordinary share capital), they will form a group for chargeable gains purposes. Any chargeable assets transferred between those group companies will then be governed by s.171 Taxation of Chargeable Gains Act 1992 . It provides that chargeable assets will be transferred for a consideration that will give rise to neither a gain nor a loss for tax purposes.

Pro advice. In practice this will be equal to the allowable acquisition cost of the asset, plus indexation from the acquisition date up to December 2017 (when indexation was frozen). This is the case regardless of any actual consideration between the two companies.

You can therefore reassure your client that there will be no corporation tax to pay, even if the asset is standing at a considerable gain.

Pro advice. The no-gain, no-loss treatment applies automatically if the 75% interest condition is met, so you don’t need to claim it on the corporation tax return.

Stamp duty - group relief

When looking at the business premises, the transfer to the new holding company is a land transaction for stamp duty land tax (SDLT) purposes. By default, the SDLT charge will be calculated by reference to market value. However, if the holding company owns more than 75% of the ordinary share capital of the transferring company, group relief is available so that no charge arises.

Pro advice. Relief is not automatic. It needs to be claimed on the SDLT return under Relief Code 12 . Ensure you advise your client of this if you are not completing the return on their behalf so it is not overlooked.

Pitfall - VAT

By default, a transfer between a VAT-registered subsidiary and the parent company will be a taxable supply. Depending on what is being transferred, the subsidiary may need to account for VAT at the standard rate, for example on plant and machinery.

The most substantial asset being transferred is probably the commercial premises. Your client might well assume that this is exempt for VAT purposes and in most cases, that is correct. But there are two exceptions where the transfer will be standard rated:

• the property is less than three years old when the freehold is transferred; or
• the subsidiary has opted to tax it.

Even where neither of these exceptions apply, there could be a further hidden tax trap triggered by a transfer if the property was purchased less than ten years ago for more than £250,000.

If there was VAT on the purchase which was recovered by your client, then the property will fall under the capital goods scheme (CGS). The transfer will be a change of use under the scheme within the prescribed CGS period (ten years for property), and so the initial VAT recovery would need to be adjusted.

Example. Acom Ltd acquired a property five years ago for £500,000 plus VAT of £100,000 which it recovered in full. In the current year, it decides to follow your advice and transfer the property to a new holding company. The transfer itself will not be chargeable but the use of the property has changed 5/10ths of the way through the prescribed period. An adjustment of 5/10ths of the initial VAT recovered will need to be made, and Acom will have to pay £50,000 to HMRC.

Pro advice. Fortunately, there is a solution to these problems. You can advise your client to form a VAT group with both companies, which they can do if the companies are under common control.

VAT group

If the two companies are in a VAT group, the transfer of the premises will be outside the scope of VAT - even if it is less than three years old or there is an option to tax in place. The companies must formally apply to register as a VAT group. HMRC’s guidance on registering a group, including links to the relevant forms, is a good starting point (see Follow up ). The group also negates the requirement for a CGS adjustment.

Pro advice 1. If your client has already made the transfer before registering the VAT group, it is possible to backdate the registration, but only by 30 days prior to the application being received by HMRC, other than in exceptional circ*mstances where HMRC has caused a delay.

Pro advice 2. Your client may be apprehensive about additional VAT reporting requirements. However, it is unlikely that the holding company will be trading, so in practice very little will change.

Pro advice 3. One drawback is that the group will be allocated a new VAT number, so ensure your client updates their invoices and details with their suppliers as soon as this is received.

Capital allowances

Capital allowances (CAs) are not available in respect of the cost of a commercial building, but they could be available on the cost of any fixtures. Examples of fixtures include electrical wiring, lighting systems, sanitary ware, carpets, etc.

There is no group relief for CAs, and by default the holding company would not be able to claim them for the cost of the fixtures transferred - even if the subsidiary brings a disposal value into account when completing its CAs computation. Again, there is a solution to this problem.

Election

You should advise your client to make an election under s.198 Capital Allowances Act 2001 . This needs to be made jointly between the subsidiary and the holding company. The purpose of this election is to agree and fix the value of the fixtures being transferred. If this is done, the holding company will be able to continue claiming CAs.

Pro advice. If your client wants to keep matters simple, transfer the fixtures at their written down tax value.

It is essential that the election is made in the correct form. Failure to adhere to this could lead to a tax clawback if HMRC deems the election to be invalid. Once made, a valid election is irrevocable, so it is essential to get it right first time.

The election should contain:

• the amount fixed by the election
• the name of each person making the election
• information sufficient to identify the plant or machinery fixture and the relevant land
• particulars of the interest acquired by or the lease granted to the purchaser
• the Unique Tax Reference (UTR) number of each person making the election, or confirmation that the person does not have a UTR.

Refer to CA26850 (see Follow up ) for further guidance on the correct format to use to avoid any errors.

HMRC guidance - group registration

CA26850

If the holding company owns at least 75% of the subsidiary, there will be no corporation tax or SDLT consequences. However, there is a risk of incurring a VAT charge on the transfer or a clawback via the capital goods scheme. Advise your client to avoid this by forming a VAT group before the transfer date.