Finance Act 1989

Gifts of business assets U.K.

1 (1) Section 126 of the M1 Capital Gains Tax Act 1979 shallbe amended as follows.

(2) For subsection (1) there shall be substituted—

“(1) If—

(a) an individual (in this section referred to as “the transferor”) makesa disposal otherwise than under a bargain at arm’s length of an asset withinsubsection (1A) below, and

(b) a claim for relief under this section is made by the transferor and theperson who acquires the asset (in this section referred to as “thetransferee”) or, where the trustees of a settlement are the transferee, bythe transferor alone,

then, subject to subsection (2) and sections 126A and 126B below,subsection (3) below shall apply in relation to the disposal.

(1A) An asset is within this subsection if—

(a) it is, or is an interest in, an asset used for the purposes of a trade,profession or vocation carried on by—

(i) the transferor, or

(ii) his family company, or

(iii) a member of a trading group of which the holding company is his familycompany, or

(b) it consists of shares or securities of a trading company, or of theholding company of a trading group, where—

(i) the shares or securities are neither quoted on a recognised stock exchangenor dealt in on the Unlisted Securities Market, or

(ii) the trading company or holding company is the transferor’s family company.”

(3) At the end of subsection (2) there shall be added the words “or

(c) in the case of a disposal of qualifying corporate bonds within the meaningof section 64 of the Finance Act 1984, a gain is deemed to accrue by virtueof paragraph 10(1)(b) of Schedule 13 to that Act, or

(d) subsection (3) of section 147A below applies in relation to the disposal(or would apply if a claim for relief were duly made under that section).”

(4) In subsection (7)—

(a) in paragraph (a), for the words “has the meaning” there shall besubstituted the words “, “holding company”, “trading company” and “trading group” have the meanings”, and

(b) paragraph (b) shall be omitted.

(5) After subsection (8) there shall be added—

“(9) Where a disposal in respect of which a claim is made under this sectionis (or proves to be) a chargeable transfer for inheritance tax purposes, thereshall be allowed as a deduction in computing (for capital gains tax purposes)the chargeable gain accruing to the transferee on the disposal of the assetin question an amount equal to whichever is the lesser of—

(a) the inheritance tax attributable to the value of the asset, and

(b) the amount of the chargeable gain as computed apart from this subsection,

and, in the case of a disposal which, being a potentially exempttransfer, proves to be a chargeable transfer, all necessary adjustments shallbe made, whether by the discharge or repayment of capital gains tax orotherwise.

(10) Where an amount of inheritance tax—

(a) falls to be redetermined in consequence of the transferor’s death withinseven years of making the chargeable transfer in question, or

(b) is otherwise varied,

after it has been taken into account under subsection (9) above, allnecessary adjustments shall be made, whether by the making of an assessmentto capital gains tax or by the discharge or repayment of such tax.”

Marginal Citations

M1 1979 c. 14.

2 After section 126 there shall be inserted—

“126A Section 126 relief: gifts to non-residents.

“126A (1) Section 126(3) above shall not apply where the transferee is an individualis neither resident nor ordinarily resident in the United Kingdom.

(2) Section 126(3) above shall not apply where the transferee is an individualor a company if that individual or company—

(a) though resident or ordinarily resident in the United Kingdom, is regardedfor the purposes of any double taxation arrangements having effect by virtueof section 788 of the Taxes Act 1988 as resident in a territory outside theUnited Kingdom, and

(b) by virtue of the arrangements would not be liable in the United Kingdomto tax on a gain arising on a disposal of the asset occurring immediatelyafter its acquisition.

126B Section 126 relief: gifts to foreign-controlled companies.

126B (1) Section 126(3) above shall not apply where the transferee is a companywhich is within subsection (2) below.

(2) A company is within this subsection if it is controlled by a person who,or by persons each of whom,—

(a) is neither resident nor ordinarily resident in the United Kingdom, and

(b) is connected with the person making the disposal.

(3) For the purposes of subsection (2) above, a person who (either alone orwith others) controls a company by virtue of holding assets relating to thator any other company and who is resident or ordinarily resident in the UnitedKingdom shall be regarded as neither resident nor ordinarily resident thereif—

(a) he is regarded for the purposes of any double taxation arrangements havingeffect by virtue of section 788 of the Taxes Act 1988 as resident in aterritory outside the United kingdom, and

(b) by virtue of the arrangements he would not be liable in the United Kingdomto tax on a gain arising on a disposal of the assets.

126C Section 126 relief: emigration of controlling trustees.

126C (a) relief under section 126 above is given in respect of a disposal of anasset to a company which is controlled by the trustees of a settlement (“therelevant disposal”),

(b) at the time of the relevant disposal the person making it is connectedwith the trustees, and

(c) at a time when the company has not disposed of the asset and the trusteeshave not ceased to control the company, they become neither resident norordinarily resident in the United Kingdom.

(2) Where this subsection applies then, subject to the following provisionsof this section, a chargeable gain shall be deemed to have accrued to thetrustees immediately before the time mentioned in subsection (1)(c) above, andits amount shall be equal to the held-over gain (within the meaning of sectin126 above) on the relevant disposal.

(3) For the purposes of paragraph (c) of subsection (1) above, the companyshall be taken to have disposed of an asset before the time referred to inthat paragraph only if it has made a disposal or disposals in connection withwhich the whole of the held-over gain on the relevant disposal was representedby reductions made in accordance with section 126(3) above; and where thecompany has made a disposal in connection with which part of that gain was sorepresented, the amount of chargeable gain deemed by virtue of this sectionto accrue to the trustees shall be correspondingly reduced.

(4) The disposals by the company that are to be taken into account undersubsection (3) above shall not include any disposal to which section 273 ofthe Taxes Act 1970 (transfers within a group) applies; but where the companydisposes of an asset by a disposal to which that section applies, the firstsubsequent disposal of the asset by another member of the group which is adisposal to which that section does not apply shall be taken into accountunder subsection (3) above as if it had been made by the company.

(5) Where an amount of tax assessed on trustees by virtue of this section isnot paid within the period of twelve months beginning with the date when thetax becomes payable then, subject to subsection (6) below, the transferor maybe assessed and charged (in the name of the trustees) to all or any part ofthat tax.

(6) No assessment shall be made under subsection (5) above more than six yearsafter the end of the year in which the relevant disposal was made.

(7) Where the transferor pays an amount of tax in pursuance of subsection (5)above, he shall be entitled to recover a corresponding sum from the trustees.

(8) Gains on disposals made after a chargeable gain has under this sectionbeen deemed to accrue by reference to a held-over gain shall be computedwithout any reduction under section 126(3)(b) above in respect of thatheld-over gain.

(9) Section 126B(3) above shall apply for the purposes of subsection (1)(c)above as it applies for the purposes of section 126B(2).”

3 (1) Schedule 4 to the M2 Capital Gains Tax Act 1979 shallbe amended as follows.

(2) In paragraph 1—

(a) in sub-paragraph (1)(b), for the words “section 126(1)(a)” thereshall be substituted the words “section 126(1)” and for the words “thatparagraph” there shall be substituted the words “section 126(1A)(a)”;and

(b) in sub-paragraph (2), the words “at the rate of 50 per cent.” shallbe omitted, and at the end of paragraph (b) there shall be added the words “, or

(c) would be so made but for section 124A of that Act (assuming, where thereis no chargeable transfer on that occasion, that there were).”

(3) For paragraph 2 there shall be substituted—

“2 (1) If—

(a) the trustees of a settlement make a disposal otherwise than under abargain at arm’s length of an asset within sub-paragraph (2) below, and

(b) a claim for relief under section 126 of this Act is made by the trusteesand the person who acquires the asset (in this Schedule referred to as “thetransferee”) or, where the trustees of a settlement are also thetransferee, by the trustees making the disposal alone,

then, subject to subsection (2) of section 126 and to sections 126A and126B, subsection (3) of section 126 shall apply in relation to the disposal.

(2) An asset is within this sub-paragraph if—

(a) it is, or is an interest in, an asset used for the purposes of a trade,profession or vocation carried on by—

(i) the trustees making the disposal, or

(ii) a beneficiary who had an interest in possession in the settled propertyimmediately before the disposal, or

(b) it consists of shares or securities of a trading company, or of theholding company of a trading group, where—

(i) the shares or securities are neither quoted on a recognised stock exchangenor dealt in on the Unlisted Securities Market, or

(ii) not less than 25 per cent. of the voting rights exercisable byshareholders of the company in general meeting are exercisable by the trusteesat the time of the disposal.

(3) Where section 126(3) applies by virtue of this paragraph, references tothe trustees shall be substituted for the references in sections 126(3)(a) and126C to the transferor; and where it applies in relation to a disposal whichis deemed to occur by virtue of section 54(1) or 55(1) of this Act, section126(6) shall not apply.”

(4) In paragraph 3—

(a) in sub-paragraph (1)—

(i) the words from “by virtue” to “(settled property)” shall beomitted,

(ii) for the words “(a) of paragraph 2(1)” there shall be substituted “2(1)(a)”, and

(iii) for the words “the said paragraph (a)” there shall be substituted thewords “paragraph 2(2)(a) above”, and

(b) in sub-paragraph (2), the words “at the rate of 50 per cent.” shallbe omitted, and at the end of paragraph (b) there shall be added the words “, or

(c) would be so made but for section 124A of that Act (assuming, where thereis no chargeable transfer on that occasion, that there were).”

(5) In paragraph 4—

(a) in sub-paragraph (2)(a), for the words “section 126(1)” there shallbe substituted the words “section 126(1A)”, and for the words “subparagraph (1)” there shall be substituted the words “sub-paragraph(2)”;

(b) for sub-paragraph (2)(c) there shall be substituted—

“(c) “the transferor” has the same meaning as in section 126 of this Actexcept that, in a case where paragraph 2 above applies, it refers to thetrustees mentioned in that paragraph,”;

(c) for sub-paragraph (3) there shall be substituted—

“(3) In this Part of this Schedule—

(a) any reference to a disposal of an asset is a reference to a disposal whichfalls within subsection (1) of section 126 of this Act by virtue of subsection(1A)(a) of that section or, as the case may be, falls within sub-paragraph (1)of paragraph 2 above by virtue of sub-paragraph (2)(a) of that paragraph, and

(b) any reference to a disposal of shares is a reference to a disposal whichfalls within subsection (1) of section 126 of this Act by virtue of subsection(1A)(b) of that section or, as the case may be, falls within sub-paragraph (1)of paragraph 2 above by virtue of sub-paragraph (2)(b) of that paragraph.” and

(d) in sub-paragraph (4), for the words “as the case may be” there shallbe substituted the words “where it applies”, and the words “(takingaccount” onwards shall be omitted.

(6) At the end of each of paragraph 5 and paragraph 6 there shall beadded—

“(2) This paragraph shall not apply where the circumstances are such that areduction in respect of the asset—

(a) is made under Chapter II of Part V of the InheritanceTax Act 1984 in relation to a chargeable transfer taking place on the occasionof the disposal, or

(b) would be so made if there were a chargeable transfer on that occasion, or

(c) would be so made but for section 124A of that Act (assuming where thereis no chargeable transfer on that occasion, that there were).”

(7) For paragraph 7 there shall be substituted—

“7 (1) If in the case of a disposal of shares assets which are not businessassets are included in the chargeable assets of the company whose shares aredisposed of, or, where that company is the holding company of a trading group,in the group’s chargeable assets, and either—

(a) at any time within the period of twelve months before the disposal notless than 25 per cent. of the voting rights exercisable by shareholders of thecompany in genreal meeting are exercisable by the transferor, or

(b) the transferor is an individual and, at any time within that period, thecompany is his family company,

the amount of the held-over gain shall be reduced by multiplying it bythe fraction defined in sub-paragraph (2) below.

(2) The fraction referred to in sub-paragraph (1) above is that ofwhich—

(a) the denominator is the market value on the date of the disposal of all thechargeable assets of the company, or as the case may be of the group, and

(b) an asset is a chargeable asset in relation to a company or a group at anytime if, on a disposal at that time, a gain accruing to the company, or as thecase may be to a member of the group, would be a chargeable gain.

(4) Where the shares disposed of are shares of the holding company of atrading group, then for the purposes of this paragraph—

(a) the holding by one member of the group of the ordinary share capital ofanother member shall not count as a chargeable asset, and

(b) if the whole of the ordinary share capital of a 51 per cent. subsidiaryof the holding company is not owned directly or indirectly by that company,the value of the chargeable assets of the subsidiary shall be taken to bereduced by multiplying it by the fraction of which the denominator is thewhole of the ordinary share capital of the subsidiary and the numerator is theamount of that share capital owned directly or indirectly by the holdingcompany.

(5) Expressions used in sub-paragraph (4) above have the same meanings as insection 838 of the Taxes Act 1988.”

Marginal Citations

M2 1979 c. 14.