De grouping charge to tax
Where assets are transferred between companies in the same corporate group, this is treated for capital gains purposes as being for such a consideration as ensures that neither a gain nor a loss arises in the transferring company. However, at present, where a company leaves a group holding an asset that was acquired from another company in the group within the previous six years, the company leaving the group is treated as if, immediately after it acquired the asset, it had sold and immediately reacquired the asset at market value. This can create a significant tax charge (referred to as a "degrouping charge") in the company leaving the group. It is intended to crystallise any latent capital gain that was not charged to tax when the asset was transferred intra-group.
Where a company is acquired from a corporate group, the purchaser will normally want to ensure that no such charges will arise in the target company, or that they will be covered by the tax covenant in the SPA.
Under the new rules effective 29 July 2011, the degrouping charge will normally no longer arise in the company leaving the group, but will instead take effect as an adjustment to the gain or loss made by the seller on the sale of the shares in the target (so that if a gain would have arisen in the company leaving the group, then the seller will make a bigger gain (or smaller loss) on the sale of those shares).