Section 37: Asset Transfer to Non-Resident Company: Recovery of Postponed Charge
Summary
1.Section 37 amends section 140 of the Taxation of Chargeable Gains Act 1992 (TCGA). Where a gain has been postponed on the transfer of an overseas branch’s assets to a non-resident company in exchange for securities consisting of shares and loan stock, the change will ensure that the disposal of any of these securities will create a deemed chargeable gain that is subject to corporation tax (CT). The postponed gain is currently brought back into charge by treating it as additional consideration on a subsequent disposal of securities. This creates a problem relating to disposals of securities in the form of Qualifying Corporate Bonds (QCBs) which are exempt from tax on chargeable gains. As a result any postponed gain is also exempt on the subsequent disposal of the QCB. The changes will have effect in relation to disposals of securities on or after 6 January 2010.
Details of the Section
2.Subsection (1)(a) amends subsection (4) of section 140 of TCGA to deem a chargeable gain to accrue to the transferor company on a disposal of securities received in exchange for the transfer of an overseas branch’s assets to a non-resident company. This replaces the previous mechanism for charging a postponed gain which increased the consideration received on a subsequent disposal of securities. The effect is to ensure that a charge will arise on the disposal of any securities, whether or not they are otherwise exempted from the charge to corporation tax on chargeable gains.
3.Subsection (1)(b) inserts new subsection (4A) into section 140. This clarifies that any postponed chargeable gain that is deemed to accrue is in addition to any gain or loss that accrues to a transferor company on a disposal of the securities themselves.
4.Subsection (2) provides a consequential amendment by omitting paragraph 35 to Schedule 7AC to TCGA. Paragraph 35 currently provides for a charge to arise on securities that are otherwise exempted from CT on chargeable gains under the substantial shareholdings exemption. Where a company disposes of shares that are exempt from chargeable gains under the Schedule, and which were received in exchange for a transfer of overseas assets to which section 140 applied, a gain is deemed to accrue to the transferor under the amended section 140(4) TCGA. Paragraph 35 of Schedule 7AC achieved this same result and is not now required.
5.Subsection (3) provides that changes made by the section will have effect in relation to any disposal of securities that takes place on or after 6 January 2010.
Background Note
6.The amended and new provisions are intended to ensure that a postponed charge on gains arising where assets of an overseas branch are transferred to a non-resident company is brought back into charge at the appropriate time.
7.The existing section 140 of TCGA creates unintended outcomes in the treatment of postponed gains where, in exchange for a transfer of assets of an overseas branch, a UK company receives securities which are themselves exempt (such as QCB’s which are exempted by section 115 of TCGA), and for which there was no other provision which brought the postponed gain back into charge to tax. The changes deem a separate chargeable gain equal to the postponed gain to accrue to the transferor at the time of disposal of the securities. This replaces the existing treatment of bringing a postponed gain back into charge by treating the postponed chargeable gain as additional consideration on a subsequent disposal of securities.
8.The changes were announced in a Written Ministerial Statement on 6 January 2010. An HM Revenue & Customs (HMRC) Technical Note and draft legislation were also published on that date on the HMRC website (http://www.hmrc.gov.uk/drafts/transfer-assets.htm).