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Sister Companies and Offsetting Capital Gains

If a company makes a profit on a sale of assets, can it set off the resulting capital gain against a loss made by a company within the same group? That is one burning issue which an authoritative Court of Appeal decision will help to resolve.

Company A sold its shares in another company and received payment in the form of loan notes. A gain crystallised on the disposal of the shares but that gain would only be chargeable on a future disposal of the loan notes. The amount of the held-over gain came to more than £203 million.

Meanwhile, company A’s parent company had suffered a capital loss of about £180 million in unconnected dealings. A planned restructuring exercise was then pursued which was designed to enable a set-off of that loss against company A’s held-over gain. However, both the First-tier Tribunal and the Upper Tribunal refused to accept that that objective had been achieved.

HM Revenue and Customs did not suggest that the restructuring was anything other than a legitimate attempt at tax planning. However, in rejecting company A’s appeal, the Court agreed with the tribunals that no valid election had been made under Section 171A of the Taxation of Chargeable Gains Act 1992. The fact that company A could have achieved the desired result by adopting a different structure could not affect the final result.