Group Relief and the Corporate Intangible Assets Regime
Falcon Group consists of Falcon Holdings Ltd (holding company), Falcon Manufacturing Ltd (trading, profitable), and Falcon IP Ltd (owns patents and receives royalties). All are UK-resident and 100% owned. In the year to 31 December 2024: Falcon Manufacturing made a trading profit of £900,000; Falcon IP made a trading loss of £450,000 (after claiming R&D expenditure credit? No - the loss arises from amortisation of acquired intangibles of £600,000 and royalty income of £150,000). Falcon Holdings has no trading activity. Falcon IP acquired the intangible from an unconnected third party in 2022 for £2m and amortises over 10 years. The group wants to minimise its overall tax liability.
1. Determine how the group can relieve Falcon IP's loss and quantify the tax saving.
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Step 1 - Character of the loss: Falcon IP's loss arises from amortisation of a chargeable intangible asset acquired from an unconnected party. Debits on intangible assets are deductible under the corporate intangibles regime (CTA 2009 Part 8) as a trading expense if the asset is held for the purposes of the trade. The loss is therefore a trading loss for group relief purposes.
Step 2 - Group relief: Falcon IP can surrender its trading loss to Falcon Manufacturing (75% common ownership, UK-resident). Group relief is available for the accounting period. Falcon Manufacturing's taxable profit is £900,000; it can claim £450,000 group relief, reducing profit to £450,000.
Step 3 - Tax saving: Without relief, Falcon Manufacturing pays 25% on £900,000 = £225,000 (marginal relief may apply - profits above £250,000 so main rate). With relief: 25% × £450,000 = £112,500. Saving = £112,500.
Note: group relief is claimed by the surrendering company and claimant company jointly, within two years of the end of the accounting period. The loss must not be otherwise relieved.
2. Consider whether the intangible amortisation is fully deductible and any elections that could improve the position.
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Under the corporate intangibles regime, amortisation of a chargeable intangible asset is deductible on an accounts basis, but there are elections:
- Fixed-rate election (s.730 CTA 2009): claim a fixed 4% per annum on the cost of the asset instead of accounts amortisation. Here accounts amortisation is £2m/10 = £200,000 per year. The fixed-rate deduction would be 4% × £2m = £80,000 - worse in early years. So no election.
- Realisation election: on disposal, elect to bring in a tax-neutral realisation - relevant only on disposal.
- Roll-over relief for reinvestment - not relevant here.
The £600,000 amortisation figure in the loss suggests the accounts amortise over a shorter period or include other intangibles. Verify the amortisation policy and that the asset is a "chargeable intangible asset" (it is, acquired from an unconnected party). If the asset were acquired from a related party, the tax deduction would be restricted to the lower of cost and tax value.
Planning: Consider whether the IP should be held by Falcon Manufacturing (which has profits) to use the debits directly, but transferring the asset may trigger a disposal - check the group reconstruction rules (s.775 CTA 2009) for tax-neutral transfers within a group.
3. What if Falcon IP's loss exceeds the group's aggregate profits - what are the options?
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If the loss exceeds available group profits, options include:
- Carry forward the trading loss under s.45 CTA 2010 (post-2017 losses) - offset against future profits of the same trade, with the £5m + 50% restriction for profits above £5m.
- Carry back one year under s.37 (if the loss is a trading loss) - offset against prior-year profits of the same trade.
- Group relief to other group companies in the same or prior accounting period (carry-back of group relief is possible within limits).
- Terminal loss relief if the trade ceases.
- Reallocation - consider whether the IP trade should be merged with the manufacturing trade so losses can be offset more flexibly.
Given the group's aggregate profit of £900,000 and loss of £450,000, the loss is fully absorbed. But if profits fall, the group should model the £5m restriction and consider the interaction with the R&D expenditure credit if Falcon IP claims R&D relief (which may be repayable rather than carried forward).