Chapter 27 Transfers of trade

Question 1

27.2 Transfer of trade between >50% connected companies

Answer 1

S Ltd
A Ltd (51% subsidiary) Seller						B Ltd (51% subsidiary) Buyer

A Ltd tax consequence:
The sales proceeds used for chargeable assets and IFAs is open market value on the date of the sale. Plant and machinery transferred at the lower of the actual sales proceeds received and original cost (same as connected parties). A joint election between the companies can be made to transfer plant and machinery at tax written down value, this election must be made within two years of transfer. Stock is transferred at market value, a joint election can be made to transfer this at the higher of price paid and cost, two-year election. Any unutilized trade and capital losses remain in A Ltd.
B Ltd tax consequences:
The selling price for A ltd is the cost for B Ltd, this applies to fixed assets, plant and stock. The cost of land and buildings is the open market value at the date of transfer for B Ltd. The tax treatment of goodwill depends on the date it was created by A Ltd as the two parties are connected.
The cost of IFAs is the open market value of the date of transfer.

Question 2

27.3 Transfer of trade between companies with 75% common ownership

Answer 2

Succession rules apply automatically. Where the succession rules apply, then the two consequences occur:
• Capital allowances in respect of plant and machinery used in the transferred trade that arise in the accounting period in which the trade is transferred are shared on a time apportionment basis between the companies. No balancing adjustments arise and the successor company takes over the tax written down value at the end of the accounting period
• Trading losses transfer with the transferred trade. No terminal loss relief is available to the predecessor company. The loss transferred is restricted if the predecessor’s liabilities exceed asset (the liabilities are incurred with connection to trade and do not include share capital, premium, reserves and loan stock. The assets taken into account are all assets to the trade which have not been transferred, valued at market value plus the consideration received).