Capital gains degrouping
Capital gains degrouping

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Capital gains degrouping
  • The envelope trick
  • Basic rule
  • Degrouping by a share disposal
  • Example
  • Substantial shareholdings exemption
  • Non-resident companies
  • Share exchanges and reconstructions
  • Substantial shareholdings exemption applies
  • Substantial shareholdings exemption does not apply
  • More...

Companies that are members of the same capital gains group may transfer assets between themselves free of corporation tax on chargeable gains (CGT), see Practice Note: Capital gains—intra-group asset transfers.

Anti-avoidance provisions are needed to prevent groups from using these rules to avoid tax when they wish to sell assets that would otherwise incur a large CGT bill. Instead of selling the asset directly, companies would be able to transfer the asset intra-group, probably to a company that had been specially set up for the purpose, and then sell the shares in the new company. This is known as the envelope trick and is described in more detail below.

The provisions that prevent companies from using the envelope trick are known as the degrouping rules and are found in section 179 of the Taxation of Chargeable Gains Act 1992 (TCGA 1992).

The capital gains degrouping rules apply even when no avoidance is intended. There is a risk that the degrouping rules may apply without the relevant companies' knowledge (until after the event). This is particularly so given that the rules can bite up to six years after an intra-group transfer has taken place (see below).

The degrouping provisions therefore represent a challenge for a group's record-keeping practices.

The envelope trick

Before the capital gains degrouping rules were introduced, groups were able to use the 'envelope' (or 'corporate

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