Transferring IP-heavy companies: an important tax change

Today’s draft Finance Bill contains a simple, but important, change to the taxation of companies which hold valuable intangibles.

As I have written about in the past (see our briefing here), the UK tax rules for intangibles contain an anomaly which makes it difficult to carry out pre-sale reorganisations, or to implement group break-up transactions, without triggering a UK corporation tax liability.  This is despite the existence of the UK substantial shareholding exemption (SSE), which would (but for the presence of valuable intangibles) generally provide for tax neutral treatment on these types of group structuring projects.

With effect from today (7 November 2018), this will change – provided that the finance bill is enacted in due course.

The new rule allows for a tax-neutral transfer of IP around a corporate group ahead of a share sale, so long as that share sale benefits from the SSE.  To prevent abuse, tax neutral treatment is not available if the purchaser of those shares then transfers them on to somebody else, as part of a wider arrangement.

This is a welcome simplification which will allow groups to undertake various types of reorganisations without some of the added complexity which often resulted from trying to navigate the previous rules.

It is also a good example of the consultation process for new legislation working properly.  HMRC consulted in the Spring on the case for reforming aspects of the intangibles tax regime and, whilst not all of the suggestions from business have been taken forward, this one change (which we argued was the most important) has been given due consideration.