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HMRC internal manual

Capital Gains Manual

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Depreciatory intra-group dividends: asset transaction test

TCGA92/S31 (6)

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 TCGA92/S31 (6)

  • an intra-group disposal at no gain/no loss under TCGA92/S171 (1)
  • an intra-group exchange of shares or debentures, or a reconstruction or amalgamation, which is treated as a reorganisation of share capital by TCGA92/S135 (3)
  • 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.

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 CG48500+.