A UK resident corporate group owns hotel assets through special purpose vehicles (SPVs). The corporate group predominantly comprises subsidiaries which carry on a hotel trade; but a few subsidiaries own hotel properties as investment assets, deriving rental income from leases granted to third party hotel operators. The corporate group wants to refinance certain SPVs, one of which one holds its hotel asset as an investment. As a term of the refinancing (which will be on standard commercial terms), the bank requires shares in these SPVs to be transferred to a new intermediate parent company (IMP); this will create a sub-group better able to give ringfenced security for the bank refinancing. The intention is for shares in each SPV to be transferred for market value consideration. This is to be satisfied by the issue of loan notes to facilitate future cash extraction from the IMP sub-group (the loan notes being subordinated to the bank financing). What corporation tax issues arise in respect of the transfer of the shares in the SPVs to IMP?
Share transfers
Assuming the corporate group as a whole qualifies as a trading group, then the transfer of shares in the trading SPVs to the IMP in consideration for the issue of loan notes gives rise to a complex interaction between the substantial shareholding exemption (SSE) regime (TCGA 1992 Sch 7AC), the ‘no gain no loss’ intra-group transfer provisions (TCGA 1992 s 171) and the capital reorganisation provisions (TCGA 1992 ss 135 and 116).
In this legislative hall of mirrors, the SSE identifies a disposal of shares in trading SPVs as being made, even though the capital reorganisation provisions would ordinarily preclude such a share disposal (TCGA 1992 Sch 7AC paras 4(1), (5)); however, the SSE does not apply to an intra-group disposal of shares. The intra-group disposal provisions are, however, disapplied where there is also a capital reorganisation (s 171(3)). HMRC guidance gives a route map of sorts at Capital Gains Manual CGM53170a and example 2. This confirms that, in this scenario, a share disposal is to be treated as made (an assumed disposal) in considering the SSE; the SSE cannot apply to that assumed disposal, though, as it is made intra-group. (The assumed disposal is treated as an intra-group transfer for these purposes, even though the consideration comprises an issue of loan notes, because a disposal for SSE purposes is to be identified without regard to s 135 or s 116(10)). The SSE will, of course, also not apply to the transfer of shares in the SPV which holds its hotel asset as an investment.
Crystallisation of chargeable gains
HMRC confirms (CGM 53170a) that where the SSE does not apply, the transfer of shares in exchange for the issue of loan notes is eligible to be treated as a capital reorganisation. The loan notes will be qualifying corporate bonds or QCBs (TCGA 1992 s 117(A1)). Section 116(5) disapplies s 135 (assuming s 135 would otherwise apply). Section 116(10) requires that a calculation be made of the chargeable gain (if any) which would arise on a notional disposal of shares in each SPV immediately prior to the transfer to IMP. Any chargeable gain arising on the notional disposal is deferred until there is a redemption or other disposal of the consideration loan notes.
Although the SSE does not apply to the actual transfer of shares in SPVs to the IMP, it may apply to the notional disposal of shares in trading SPVs as required under s 116(10). If the SSE does apply to that notional share disposal, there is no chargeable gain to be deferred which can accrue on the redemption of the consideration loan note.
However, the SSE clearly cannot apply to any gain arising on a notional disposal of shares in the SPV holding its hotel asset as an investment, such that that chargeable gain (at least) will be brought into charge to tax on the redemption of the consideration loan note.
Deferred cash consideration?
Could such crystallisation of certain or possible chargeable gains under s 116(10) be avoided through the transfer of shares in each SPV being made for a deferred cash consideration? The risk here is that the subordination of any deferred cash consideration to repayment of the bank financing would require documentation that could result in the deferred consideration obligation, comprising a loan relationship of IMP and thus a QCB (s 117(A1)). In that event, the capital reorganisation legislation would remain engaged and exactly the same analysis would apply as for a loan note issuance by IMP.
Intra-group share transfers
The safer course may, therefore, be to bring the relevant SPV share transfers more clearly within the ‘no gain no loss’ intra-group provisions (TCGA 1992 s 171). By this means, the crystallisation of gains (which will or may be chargeable gains) is avoided; this is unless and to the extent that, by reason of enforcement or other procedures taken by the bank, the IMP sub-group is subsequently sold and thus degrouped from the share transferor companies.
This could be achieved if the transfer of shares in the SPVs is made to the IMP, but the loan note consideration for each of the share transfers is issued by the immediate parent company of the IMP (and not the IMP itself). In these circumstances, it is considered that s 135 (and thus s 116(10)) should not apply to the transfer of shares in each SPV, as these share transfers cannot comprise a capital reorganisation. (The IMP is not issuing consideration loan notes to each share transferor in exchange for shares in the SPVs; see CGM52523.)
On that basis, the transfer of shares in each SPV to the IMP should fall to be treated as being made intra-group on a ‘no gain no loss’ basis. Only in the event of a subsequent degrouping of the IMP, within six years of the intra-group share transfers (which would be sought to be avoided), would it be necessary to consider whether chargeable gains arise in connection with such share transfers (s 179(3)).
