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CTM80151 | Groups: group Relief: the group relationship

From HM Revenue & Customs · Company Taxation Manual

CTA10/S131(1)(a), CTA10/Part 5/Chapter 5, CTA10/Part 24/Chapter 3,

For companies to be members of the same group under CTA10/S152:

  • one company must be a 75% subsidiary of the other, or

  • both must be 75% subsidiaries of a third company.

See also the consortium relief conditions in CTM80530.

The definition of ‘75% subsidiary’ is in CTA10/S1154(3), and requires one company to have direct or indirect beneficial ownership of at least 75% of the ordinary share capital in another.

Beneficial ownership can be affected in cases where a group company enters liquidation. Contact BAI (CT Structure - Group Relief) if you need advice.

In addition to the rules in Part 24 there are extending qualifying tests for group relief purposes:

  • tests that include not only the appropriate percentage of the ordinary share capital, but also the beneficial entitlement to profits and assets (in CTA10/S151(4)) – see CTM80155 onwards, and

  • tests that ensure that two companies are not treated as belonging to the same group if there are arrangements by which, broadly:

  • one of the two companies could transfer to another group, or

  • the two companies are, or could be, under different control, or

  • assets comprised in a trade could be transferred out of the group by one of the two companies without attracting a balancing adjustment.

The ‘arrangements’ legislation is in CTA10/Ss154-156, and there is detailed guidance at CTM80165 onwards.

CTA10/Part 24/Chapter 3 looks at both direct and indirect ownership of ordinary share capital. Indirect ownership is where one company is treated as owning the share capital held by its subsidiaries (and so on down the chain).

The proportion of indirect ownership is calculated (under CTA10/S1156) by multiplying the ownership fractions through the ownership chain. In order to calculate a company’s percentage holding in a particular subsidiary:

  • Multiply the percentage holding the company has in its direct subsidiary by the holding that subsidiary has in its subsidiary, and so on down to the subsidiary in question, and

  • If a company has both a direct and indirect (or more than one indirect) holding in the same subsidiary, then in order to determine that company’s total holding in the subsidiary, all percentages should be added together.

From 1 April 2017, this definition of a group relationship also applies for the purposes of group relief for carried-forward losses.

Example: Indirect Ownership calculation

The diagram shows A Limited owns 90% of B Limited and 60% of C Limited. B Limited owns 40% of C Limited. Combined ownership of A in C is 96% (60% direct + 36% indirect). Formula is 90% × 40% = 36%.

A Limited directly owns:

  • 90% of the ordinary share capital of B Limited

  • 60% of the ordinary share capital of C Limited

B Limited directly owns:

  • 40% of the ordinary share capital of C Limited

For the purposes of CTA10/S151(4), assume all entitlements follow share capital.

Why indirect ownership matters

Without indirect ownership:

  • A and B are in the same group because B is a 75%+ subsidiary of A.

  • C would not be part of the group because it does not meet the 75% subsidiary test or the common 75% subsidiary rule.

To remedy this, legislation looks at indirect ownership and combining multiple chains of ownership.

Legislation

Sections S1155 and S1156 treat A as indirectly owning the ordinary share capital owned (directly or indirectly) by B, including its shares in C.

The formula is:

Fraction of share capital owned by A in B × Fraction of share capital owned by B in C

90% × 40% = 36%

So:

  • A directly owns 60% of C

  • A indirectly owns 36% of C (through B)

  • S1157 requires these fractions to be added together:

60% + 36% = 96%

96% is enough to create a group relationship, so A, B and C are all in a group for group relief purposes.

Additional notes

  • Registered industrial and provident societies can be subsidiaries for group relief, as well as owners of subsidiaries.

  • When deciding if a company is a ‘75% subsidiary’, shareholdings owned directly or indirectly in companies whose shares are held on trading account (for example, by a dealer) cannot be taken into account (CTA10/S151(3)).