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HMRC internal manual

Capital Gains Manual

Depreciatory transactions: outline

TCGA92/S176 & TCGA92/S177

A loss on a disposal of shares or securities can be created or enhanced by a “depreciatory transaction”, that is a transaction that takes value out the shares, typically the payment of a dividend or the transfer of an asset out of a subsidiary company for less than full payment.

The depreciatory transaction rules were introduced partly in response to the widespread creation of the losses in the early years of capital gains tax (as then applied to companies) but such transactions are typically undertaken for entirely commercial reasons. In broad terms, the rules seek to adjust any tax loss to reflect the economic loss on a disposal of shares or securities.

TCGA92/S176 deals with depreciatory transactions within groups of companies. TCGA92/S177 extends the rules to cover depreciatory distributions to a company with at least a 10 per cent interest in the class of shares or securities to which the distribution relates and adopt the same general rules as apply to depreciatory transactions within groups.

The rules apply for the purposes of corporation tax to restrict the allowable loss on a disposal of shares or securities. They cannot convert a loss into a gain or increase the amount of a gain. In cases where the result of a depreciatory transaction is to avoid a tax charge on a gain you should consider the possible application of the value shifting provision in TCGA92/S31 (CG48500+) or, for disposals before 19 July 2011, TCGA92/S30 (subject to modification by TCGA92/S31 to TCGA92/S34 for most group transactions), see CG13200+ and CG46800+.

Indexation allowance will not in general be able to create or increase a loss on a disposal on or after 30 November 1993. Detailed instructions are at CG17700+.

The main features of the rules have remained largely unchanged since being introduced in 1968, apart from the extension to 10% holdings in 1969; however there was a significant change as part of a wider package of corporate gains measures in Finance Act 2011: for disposals on or after 19 July 2011 an adjustment is only required for transactions within the 6 years before the date of disposal.

Note that the anti-avoidance rule in TCGA92/S16A will apply to prevent any loss being allowable where the arrangements have a main purpose of obtaining a tax advantage. That rule does not feature a time limit, CG15835.

This guidance was updated in 2011 and reflects the rules that were relevant then. If required, the previous guidance can be obtained from the various commercial tax information services or directly from Capital Gains Technical Group.

The guidance is arranged as follows:

  • A general description of the issue addressed by the legislation, CG46510.
  • When the rule applies, CG46520.
  • A discussion of the various types of depreciatory transactions, CG46530.
  • The approach to “post-acquisition profits”, CG46540.
  • What constitutes a material reduction in value, CG46550.
  • The method of adjustment, CG46560.
  • Compensating adjustments on later disposals, CG46570.
  • The extension to non-group “dividend stripping” transactions in TCGA92/S177, CG46580.