CG46830 | Depreciatory intra-group dividends: asset transaction test

Section 31(6) of the Taxation of Chargeable Gains Act (TCGA) 1992

There must be a transaction giving rise to distributable commercial profits, but which does not give rise to taxable profits. There are three types of such transactions listed in section 31(6) TCGA 1992.

• an intra-group disposal at no gain/no loss under section 171(1) TCGA 1992

• an intra-group exchange of shares or debentures, or a reconstruction or amalgamation, which is treated as a reorganisation of share capital by section 135(3) TCGA 1992

• a revaluation of an asset.

The third category of transaction, a revaluation, is unlikely to give rise to distributable profits under UK company law which allows only realised profits to be distributed. This category recognises that a drain out dividend scheme may involve a company resident in the UK but incorporated outside the UK.

In the example in CG46820 the asset transaction is the sale of the underlying valuable asset by Q to R for £70M at Stage 1. This disposal is at no gain/no loss for capital gains purposes under section 171(1) TCGA 1992, and is accordingly caught by section 31(6) TCGA 1992.

Finance Act 2011 introduced a new Targeted Anti-Avoidance Rule for disposals of shares and securities by companies on or after 19 July 2011. See CG48500P.