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CG45703 | ETMD: division of a UK business: introduction and main conditions (2)

From HM Revenue & Customs · Capital Gains Manual

TCGA 1992 section 140A was amended to include subsection 140A(1A) which sets out the particular conditions which have to be met before section 140A(4) can apply to a partial division. This paragraph covers those particular conditions and CG45704 and 5 set out the other conditions which have to be met. Note: section 140A can only apply to partial divisions which take place on or after 1 January 2007.

The conditions are:

  1. There is a transfer of part of a business from a company resident in one member state to one or more companies resident in another member state; section 140A(1)(a). Note: This is the first difference between a transfer of assets and a partial division. For a transfer of assets there can only be one transferee but for a partial division there can be more than one.

  2. The business must be carried on in the UK; section 140A(1A)(b).

  3. At least one transferee must be resident in a member state which is not the resident state of the transferor; section 140A(1A)(c). This follows on from the first major difference set out at bullet point 1. It is entirely possible that where say three companies are involved two companies will be resident in the same member state. If that were the case then the legislation would still apply provided that the third company was resident in another member state.

For example companies A and B are resident in the same member state and company C is resident in another member state. Companies A and C both transfer part of their business to B. Provided the other conditions are met section 140A would apply to the transfer of assets between companies C and B. The tax treatment on the transfer between companies A & B will depend on the law in the state in which they are resident. For example if ignoring all other factors it was the UK and companies A and B were in the same capital gains group then section 171 would apply.

  1. The transferor continues to carry on a business after the transfer; section 140A(1A)(d). This is the second difference between a transfer of assets and a partial division. For a transfer of assets there is no requirement within section 140A(1) that the transferor must continue to carry on a business after the transfer.

  2. That the conditions in section 140A(1)(c)-(e) are met and these are as follows.

  3. A claim is made by the transferor and the transferee; section 140A(1)(c).

  4. The anti avoidance rule in section 140B, see CG45731 does not apply; section 140A(1)(d).

  5. The conditions set out in CG45705 below are met; section 140A(1)(e) and section 140A(3).

  6. That either the condition in section 140A(1B) or (1C) is met; section 140A(1A)(f). This is the third difference between a transfer of assets and a partial division. See CG45704 below.