Budget 2011 – Preventing Avoidance: Corporate Gains Degrouping Charge
The Government are to introduce new legislation in the Finance Bill 2011, effective from 23 March 2011 to target tax avoidance. The legislation is drafted to prevent groups of companies avoiding corporation tax on chargeable gains by using complex arrangements that seek to exploit the “associated companies exception” to a degrouping charge.
Companies in a group may generally transfer assets on a no gain/no loss basis. If the company then leaves the group, it was possible for the capital gain of the asset to escape tax. This is known as "enveloping".
The measure introduced in the Budget removes any doubt about the effect of the current rules by making clear that a degrouping charge will arise where disposals include an intermediate step to which an exception to the charge has applied (the “associated companies exception”).
In addition, the rule will also apply a degrouping charge where the connection between the two groups mentioned above is subsequently broken.