Does a UK group relief claim reduce a CFC's tested income on Form 5471?

Not directly. US tax principles have no group relief, so the claimant company's income on Schedule C and Schedule I-1 is not reduced by another company's loss. The claim lowers the claimant's UK Corporation Tax, which changes the foreign taxes reported on Schedule E and Schedule I-1, line 7. The loss itself stays on the surrendering company's own Form 5471 as a tested loss.

What is the 75% test for UK group relief?

Two companies are in a group relief group if one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company. HMRC guidance requires beneficial ownership of at least 75% of ordinary share capital, plus entitlement to at least 75% of distributable profits and of assets on a winding-up. Indirect holdings are multiplied through the chain and added together.

Where does a payment for group relief go on Form 5471?

It is reported on Schedule M of both companies by a Category 4 filer, translated at the average exchange rate for the year. If it does not fit a specific line, it goes on the lines for other amounts received and paid, with the attached statement the IRS instructions require. Its US characterisation, for example as a distribution or contribution, needs separate analysis on the facts.

Can one UK subsidiary's loss offset another's income for US purposes?

Yes, but at shareholder level rather than company level. The US shareholder lists each CFC's tested income and tested loss from Schedule I-1 on Schedule A of Form 8992 and totals its pro rata shares. That netting is a US mechanism measured under US rules. It operates independently of whether any UK group relief claim was actually made between the companies.

What happens if a group relief claim is made after the US return is filed?

The claimant's UK tax for that year changes, which is an adjustment to foreign income taxes. The IRS instructions for Schedule E say such adjustments, including refunds, are reported in the year to which the taxes relate rather than the year of adjustment, and that this may require an amended return under section 905(c). UK claims can be made up to the first anniversary of the claimant's filing date.

Form 5471 and UK Group Relief Between Subsidiaries

Q: Is a payment for group relief taxable in the UK?

No, within limits. HMRC's Company Taxation Manual says a payment made by the claimant to the surrendering company under an agreement between them, up to the amount of the loss surrendered, is ignored. It is not taken into account in computing either company's profits or losses and is not treated as a distribution. The cap is the loss surrendered, not the tax saved.

Form 5471 is prepared company by company, so a UK group relief claim between two subsidiaries does not move a loss from one Form 5471 to another. The surrendering company's loss stays on its own form for US purposes, the claimant company's income stays whole on its form, and the only thing that really changes is the claimant's UK Corporation Tax bill, which is lower. That lower tax figure then runs through Schedule E, Schedule E-1, Schedule H, Schedule I-1 and Schedule Q of the claimant's form, and any payment made for the loss lands on Schedule M of both forms.

That is the short answer. The longer one matters for a US person who owns a UK holding company with several operating subsidiaries, because the UK computation and the US computation are answering different questions. The UK looks at the group as an economic unit and lets losses travel. The US information return looks at each controlled foreign corporation (CFC) separately and only brings the results together later, at shareholder level, on Form 8992. In the returns we prepare for owner-managed UK groups, the mismatch between those two views is the single most common source of inconsistent schedules.

What is UK group relief and which companies can use it?

UK group relief is a Corporation Tax relief that lets one company surrender a loss, or certain other amounts, to another company in the same group, so that the claimant deducts it from its own total profits. HMRC's Company Taxation Manual describes the idea as taxing the economic unit: in its own example a company with profits of £1,000 owns a subsidiary with losses of £100, and group relief ensures the group pays tax on £900 (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm80105). The same page is careful to add that the relief stops short of full consolidation. The companies remain separate legal entities for tax, and the surrendering company must actively consent.

The group relationship is defined in the Corporation Tax Act 2010. Two companies are members of the same group if one is a 75% subsidiary of the other, or both are 75% subsidiaries of a third company (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm80151). The 75% test is not just about share capital. HMRC's guidance at https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm80155 sets out three limbs that the parent must meet:

Beneficial ownership, direct or indirect, of at least 75% of the subsidiary's ordinary share capital.
Beneficial entitlement to at least 75% of any profits available for distribution to the subsidiary's equity holders.
Beneficial entitlement to at least 75% of any assets available for distribution to equity holders on a winding-up.

Indirect holdings are multiplied down the chain and added together, and there are separate rules that break the group relationship where arrangements exist for a company to leave the group or come under different control. Those arrangements rules matter in a sale year, which is exactly when a US owner is most likely to have a complicated Form 5471 as well.

HMRC lists what can be surrendered (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm80110). Trading losses, excess capital allowances and non-trading loan relationship deficits may be surrendered in full, whether or not the surrendering company has other profits of its own. Qualifying charitable donations, UK property business losses, management expenses and non-trading losses on intangible fixed assets can be surrendered only to the extent they exceed a profit-related threshold. Since 1 April 2017 a separate regime also allows certain carried-forward losses to be surrendered, subject to the general restriction on the use of carried-forward losses (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm82010).

How is a group relief claim made in the Company Tax Return?

A group relief claim is made by the claimant company in its Company Tax Return, with the consent of the surrendering company. HMRC requires every claim to name the surrendering company and to state the amount in figures rather than by formula. Its own example of a valid claim is a stated pound amount from a named company, and its example of an invalid claim is one for whatever amount is needed to reduce profits to a target figure. A separate claim is needed for each surrendering company and each accounting period.

The time limit is generous, and that generosity is what causes problems on the US side. Under HMRC Statement of Practice 5/01, reproduced by HMRC (https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm97060), a claim can be made or withdrawn up to the first anniversary of the claimant company's filing date, or later if an enquiry is open. GOV.UK states that the filing deadline for a Company Tax Return is 12 months after the end of the accounting period (https://www.gov.uk/company-tax-returns). Put together, a group can still be deciding who surrenders what to whom long after the US shareholder's return, with the Forms 5471 attached, has been filed.

Does Form 5471 recognise UK group relief?

No. Form 5471 has no line, schedule or election that imports a foreign loss surrender. The IRS instructions at https://www.irs.gov/instructions/i5471 tell filers to complete a separate Form 5471 and all applicable schedules for each foreign corporation. Schedule C is the income statement of that corporation, reported in its functional currency under US GAAP. Schedule H converts that corporation's book income into its current-year earnings and profits (E&P) for US tax purposes. Schedule I-1 reports that corporation's own tested income or tested loss. None of these is computed on a group basis, and none starts from UK taxable profits.

The practical consequence is that a group relief claim is invisible in the income figures of both companies. The profitable subsidiary still shows its full pre-tax profit. The loss-making subsidiary still shows its full loss. What the claim changes is tax: the amount of UK Corporation Tax the claimant accrues and pays for the year. In our experience the failure mode is a preparer who starts from the UK tax computation, sees profits chargeable to Corporation Tax after group relief, and carries that reduced figure into the US schedules as though it were the company's income.

What changes on the claimant company's Form 5471?

The claimant's Form 5471 changes wherever foreign income tax appears. Because the company's UK liability falls while its US-measured income does not, the relationship between the two shifts, and several schedules need to move together:

Schedule C, line 21, reports income tax expense under US GAAP, which includes current and deferred tax. The current tax charge in the UK accounts should already reflect the claim if it was decided before the accounts were signed.
Schedule E, Part I, reports the foreign income taxes actually paid or accrued by the corporation for which a credit is allowed, in the local currency in which the tax is payable and translated at the average exchange rate for the year to which the tax relates.
Schedule E-1 carries the cumulative balance of foreign income taxes by income group, so an error in one year's accrual rolls forward.
Schedule H, line 2g, reconciles the book tax expense on Schedule C to the income taxes actually deducted in arriving at E&P. A lower UK tax bill means a smaller reduction, and therefore higher E&P in the claimant.
Schedule I-1, line 7, reports the foreign income taxes properly attributable to tested income. This is the figure the shareholder uses for foreign tax credit purposes.
Schedule Q allocates income, deductions and taxes to income groups by tested unit, and is where the high-tax exclusion is flagged.

The high-tax exclusion deserves particular care. The IRS instructions refer to the election under Treas. Reg. 1.951A-2(c)(7), which allows tested income to be excluded where the effective foreign rate on it, measured tested unit by tested unit under US principles, is high enough relative to the US corporate rate. A UK trading subsidiary paying the 25% main rate (confirmed at https://www.gov.uk/government/publications/rates-and-allowances-corporation-tax/rates-and-allowances-corporation-tax ) often looks comfortably high-taxed. A subsidiary that has claimed a large amount of group relief may not be. Its income for US purposes is undiminished, but the UK tax on that income has been cut by another company's loss. The effective rate that the regulation tests is the actual tax over US-measured income, not the UK headline rate, so a claimant that qualified last year can fail this year purely because of the claim.

There is a second-order rate point on the UK side. GOV.UK confirms that the £50,000 and £250,000 profit thresholds for the small profits rate and marginal relief are proportionately reduced by the number of associated companies. In a group of several UK companies those limits shrink quickly, so the rate applied to the claimant's remaining profit after group relief needs to be checked rather than assumed.

What changes on the surrendering company's Form 5471?

Very little, and that is the point. For UK purposes the surrendering company has given its loss away and has nothing to carry forward in respect of it. For US purposes the loss still belongs to the company that incurred it. Its Schedule C shows the loss, its Schedule H shows a current-year deficit in E&P, and its Schedule I-1 shows a tested loss on line 6. The IRS instructions state that where a CFC has a tested loss on line 6, zero is entered on line 7 for foreign income taxes and on line 8 for qualified business asset investment.

Two tracking records therefore diverge and must be kept separately. The UK loss memorandum shows the loss as used. The US E&P workpapers on Schedule J show a deficit that persists in that company until it earns its way out. A later dividend from the loss-making subsidiary, or a liquidation of it, will be measured against the US figures. Using the UK loss record to answer a US question is an error we correct regularly when taking over a file.

How are payments for group relief treated for US purposes?

UK law does not require any payment for a loss surrendered, but groups frequently make one so that the surrendering company is not left out of pocket, particularly where there are minority shareholders or lender covenants. HMRC's guidance at https://www.gov.uk/hmrc-internal-manuals/company-taxation-manual/ctm80145 says that a payment made by the claimant to the surrendering company under an agreement between them, up to the amount of the loss surrendered, is ignored. It is not taken into account in computing the profits or losses of either company and is not treated as a distribution. HMRC adds that the cap is the amount of the loss itself, not the tax value of the relief.

US tax principles have no equivalent rule that switches the payment off. It is a real transfer of value between two related CFCs, and it has to be characterised. We do not think there is a single answer that fits every group. A payment that runs from a subsidiary to its direct parent may be analysed differently from one that runs from parent to subsidiary, and a payment between two sister companies may need to be analysed as moving up to the common parent and back down. Depending on the direction and the facts, the result may be a distribution, a capital contribution, or something else, and each of those has different consequences for E&P on Schedule J, previously taxed E&P on Schedule P and the distribution reporting on Schedule R. This needs analysis on the facts each year. What should never happen is the payment being left off the form because the UK ignores it.

Whatever the characterisation, the transaction is reportable. The IRS instructions require every Category 4 filer to complete Schedule M to report transactions between the foreign corporation and specified related parties during its annual accounting period, translated at the average exchange rate for the foreign corporation's tax year. Dividends received and paid have their own lines. Amounts that fit no specific line go on the lines for other amounts received and other amounts paid, and the instructions require an attached statement describing the type of amount, with a totals line that ties to the schedule. If the payment is left outstanding at the year end, the intercompany balance also needs to be considered for the Schedule M lines covering amounts borrowed and loaned, and it should agree to the balance sheet on Schedule F. The payment appears twice: as an amount paid on the claimant's Schedule M and as an amount received on the surrendering company's.

Worked illustration: two UK subsidiaries and one claim

The following is an illustration only, with invented figures. A US citizen living in London owns 100% of a UK holding company, which owns 100% of two UK trading subsidiaries, Sub A and Sub B. All three are CFCs with sterling as their functional currency and a 31 December 2025 year end. For the illustration we assume an average exchange rate of £0.80 to $1, which is an assumption for arithmetic convenience and not a published rate.

Sub A makes a profit of £800,000 before tax. Sub B makes a trading loss of £300,000. Assume, for simplicity, that UK taxable profits and US-measured income are the same before tax. Sub B surrenders the whole £300,000 and Sub A claims it. Sub A's profits chargeable to Corporation Tax fall to £500,000 and, assuming the 25% main rate applies, its UK tax is £125,000 rather than the £200,000 it would have paid without the claim. Under a group agreement, Sub A pays Sub B £75,000 for the loss, which is within the cap HMRC describes because it does not exceed the £300,000 surrendered.

Sub A's Form 5471: income before tax of £800,000 ($1,000,000 at the assumed rate). UK tax of £125,000 ($156,250) on Schedule E and on Schedule I-1, line 7. Tested income after the tax deduction of £675,000 ($843,750). Payment of £75,000 ($93,750) reported on Schedule M as paid to a related foreign corporation.
Sub B's Form 5471: loss of £300,000 ($375,000) on Schedule C, a matching E&P deficit on Schedule H and a tested loss on Schedule I-1, line 6. Zero on lines 7 and 8. Receipt of £75,000 ($93,750) reported on Schedule M.
Holding company's Form 5471: its own income and expenses only. It reports nothing in respect of the claim unless the payment is analysed as passing through it.
Shareholder level: Sub A's tested income of $843,750 and Sub B's tested loss of $375,000 are listed separately on Schedule A of Form 8992 and combined there, giving $468,750 in this simplified illustration.

Now look at the rate. Sub A paid £125,000 of UK tax on £800,000 of income as the US measures it. That is roughly 15.6%, not 25%. A preparer who assumed Sub A was a 25% taxpayer when considering the high-tax exclusion would be working from the wrong number. The loss that produced the saving is sitting, untouched, on Sub B's form. The characterisation of the £75,000 payment between two sister companies is left open in this illustration deliberately, because it depends on analysis we would do on the actual documents.

How do tested income and tested loss combine on Form 8992?

Form 8992 is where the US system does its own netting. The IRS instructions at https://www.irs.gov/instructions/i8992 explain that a US shareholder uses Schedule A of Form 8992 to report its pro rata share of amounts from each CFC's Schedule I-1. Tested income from line 6 of each Schedule I-1 goes in one column and tested loss in another, and the shareholder's pro rata shares are totalled across all CFCs. Where the result on Part I is zero or negative, the instructions say the rest of the calculation is not completed.

So the US does allow one subsidiary's loss to offset another's income, but it does so at shareholder level, on its own terms and by its own measurement. It is a parallel mechanism, not a recognition of the UK claim. The two can produce different answers. UK group relief can only shelter the claimant's UK profits of the overlapping period and is limited to the lower of the surrenderable amount and the claimant's available total profits. The US aggregation simply nets pro rata shares in the same shareholder tax year, and a loss-making CFC brings no foreign taxes with it. The combination that often surprises owners is this: the loss reduces UK tax through group relief and reduces the US inclusion through aggregation, but it also strips out UK tax that would otherwise have supported foreign tax credits or the high-tax exclusion.

A note on currency of the rules. The Form 8992 instructions on IRS.gov at the time of writing are the December 2024 revision. Public Law 119-21, enacted on 4 July 2025 and already referenced in the December 2025 Form 5471 instructions, amended parts of this regime for later tax years. We have not restated those changes here because the Form 8992 instructions had not yet been updated to reflect them. The form revision for the year being prepared should always be checked.

What if the group relief claim is made after the US return is filed?

This is the gap we see least discussed. Because a UK claim can be made or withdrawn well after the accounting period ends, the UK tax accrued on the claimant's Form 5471 can turn out to be wrong after filing. If the subsidiary accrued tax at the full amount and a later claim produces a repayment, the foreign tax for that year has changed. The IRS instructions for Schedule E are explicit: adjustments to foreign income taxes paid or accrued in a prior year are not reflected on Schedule E in the year of adjustment. They are reported in the year to which the taxes relate, which may require an amended return, and the instructions point to section 905(c). Refunds are specifically listed as adjustments.

The same applies in reverse where a claim is withdrawn or HMRC reduces it on enquiry. In our preparation process we ask the UK accountants for the group relief matrix in writing before the Forms 5471 are finalised, and we ask whether it is final or provisional. A provisional matrix is disclosed in our workpapers so that a later change is identified as a redetermination rather than discovered by accident two years on.

Do the foreign tax credit splitter rules need to be considered?

They need to be tested. Schedule E, Part III, of Form 5471 has a column for foreign income taxes suspended under section 909, the rule aimed at arrangements that separate foreign taxes from the income to which they relate. The regulations under that section include loss-sharing under a foreign group relief regime among the arrangements to be examined. Whether a particular surrender falls within them depends on technical definitions and on whether the loss could have been used by the surrendering company against its own income. For most straightforward UK trading groups owned by an individual the answer does not change the filing, but it is a question the workpapers should show was asked, and it becomes more important where a section 962 election is in point.

How do Schedule C and Schedule F stay consistent with the UK statutory accounts?

UK statutory accounts for each company will usually reflect the group relief position in the tax note, and a payment for group relief is commonly presented within the tax line or as an intercompany balance rather than as trading income or expense. Schedule C asks for income tax expense under US GAAP on line 21, and Schedule F asks for a US dollar balance sheet. The instructions then direct that differences between book tax expense and the taxes that actually reduce E&P are dealt with on Schedule H, line 2g. Before we sign off a group's forms we check the following:

The tax charge on each company's Schedule C agrees to its own statutory accounts, not to a group total.
The foreign tax on Schedule E agrees to the Corporation Tax computation after the claim, and to cash paid or a year-end creditor on Schedule F.
Any payment for group relief appears on Schedule M of both companies, in the same amount and at the same average rate.
The intercompany balances on the two Schedule F balance sheets mirror each other.
Schedule H, line 2g, explains any difference between book tax and the tax deducted for E&P.
The tested loss company shows zero foreign taxes on Schedule I-1, line 7.
The Form 8992 Schedule A figures tie line by line to each company's Schedule I-1.

What should the US owner of a UK group take from this?

Group relief is a UK computation that changes UK tax. Form 5471 is a US information return that reports each company on its own. The loss does not move, the tax does, and any payment between the companies is a related-party transaction that has to be reported and characterised. The cost of getting the forms wrong is not only technical. The IRS instructions state a $10,000 penalty for each annual accounting period of each foreign corporation for failure to furnish the required information, and a group with a holding company and several subsidiaries has several forms at risk. Preparing them together, from one reconciled set of UK accounts, UK computations and a confirmed group relief matrix, is what keeps the schedules consistent with each other and with the Form 8992 that follows.