CG57360 | Non-resident companies: quantifying tax set-off available following capital dividends or distributions

There are rules in TCGA92/S13(7A)* to determine the amount of tax arising on a subsequent distribution which can be relieved.

The rules are set out in CG57375, and also apply where a deduction may be due under TCGA92/S13(7) on a disposal of the participator's interest, see CG57370.

Once capital gains tax has been paid under TCGA92/S13(2), then the whole of that tax is available for set-off against any tax liability on a subsequent distribution where the conditions for relief are met. Should only half of the gain be distributed this does not mean that only half of the section 13 capital gains tax can be set off. The section 13 tax represents a pool of tax credit to be used up against tax liability arising from appropriate distributions in respect of the same gain. Thus if only half of the gain is distributed but the tax liability on the distribution is at a higher rate than the tax on the section 13 gain, the tax credit relief will be more than half of the Section 13 tax.

It is a condition of TCGA92/S13(5A) relief that the tax arising on the gain attributed under TCGA92/S13 must have been paid. In some cases the liability on the section 13 gain and on the distribution will arise in the same year of assessment or accounting period, and in other cases the tax on the section 13 gain will not have been paid.

In practice relief may be given by set off providing that the only reason preventing relief being given is that tax on the section 13 gain is unpaid.

Example 1

Facts

• A UK resident shareholder owns half the shares in a non-resident close company. The company structure is straightforward and the UK resident is a 50% participator. The shareholder does not claim the remittance basis.

• In January 2016 the non-resident company sells an asset realising a gain of £100,000.

• The UK resident has other gains in 2015-16 and is chargeable to Capital Gains Tax at 28%. See CG10245 for information about rates of tax.

• In June 2017 the company makes a distribution to its shareholders and the Income Tax liability on the distribution was £30,000 (ignoring adjustment) for the individual.

Capital Gains Tax treatment

January 2016 - The ordinary rules of TCGA92/S13 apply. Half the gain of £100,000 is attributable to the shareholder and is chargeable to Capital Gains Tax in 2015-16. The tax due is

• Section 13 gain = £50,000

• CGT @ 28% = £14,000

June 2017 - The tax paid under TCGA/92/S13(2)* is available for set off. The Income Tax due on the distribution for 2017-18 is

• Income Tax = £30,000

• less Section 13 tax of £14,000

• Tax due = £16,000

Example 2

Facts

A UK resident shareholder owns half the shares in a non-resident close company. The company structure is straightforward and the UK resident is a 50% participator.

• The shares cost £10,000 in July 2009.

• In March 2016 the non-resident company sells an asset realising a gain of £60,000.

• The UK resident has other gains in 2015-16 and is chargeable to Capital Gains Tax at 28%. See CG10245 for information about rates of tax.

• In July 2017 the non-resident company is dissolved. There is an excess of assets over liabilities. The liquidator makes a capital distribution to shareholders. The total sum distributed to shareholders is £200,000.

• The UK resident has other gains in 2017-18 and is chargeable to Capital Gains Tax at 20%.

Capital Gains Tax treatment

March 2016 - The ordinary rules of TCGA92/S13* apply. Half the gain of £60,000 is attributable to the shareholder and is chargeable to Capital Gains Tax in 2015-16. The tax due is

• Section 13 gain = £30,000

• CGT @ 28% = £8,400

July 2017 - As an amount in respect of the whole of the gain has been distributed, the whole of the tax paid is available for set off. But a capital gain has now accrued to the shareholder because a capital distribution has been received from the liquidator. TCGA92/S122 applies.

The Capital Gains Tax liability for 2017-18 is

*TCGA92/S13 was re-written for disposals from 6th of April 2019 see CG10150.