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HMRC internal manual

Company Taxation Manual

Particular topics: dividend-stripping: value of security reduction

A distribution received by a dealing company in respect of a holding (see CTM36710) which is an ingredient in a holding amounting to 10% ofall holdings of the same class (see CTM36715) is caught by ICTA88/S736 if that distribution causes a material reduction in the value of the holding.This reduction is arrived at by comparing the value of the security at the date of acquisition with the value at the accounting date, or the date of realisation or appropriation, as the case may be. To the extent that a reduction in value is attributable to a distribution on the holding (‘the relevant reduction’), and to the extent that reduction creates a dealing loss, that dealing loss will be disallowed.

This is achieved by treating the amount of ‘the relevant reduction’ as:

  • a trade receipt, if the holding is realised or appropriated out of trading stock,
  • an addition to the value of the holding if that holding is part of the trading stock at the accounting date.

ICTA88/S736 does not run unless the reduction in value is ‘material’ and what constitutes a material reduction is, of course, dependent upon the circumstances of the particular case. Frequently, the amount of the reduction attributable to the distribution can only be determined within fairly wide limits, and in practice both the amount of the reduction and the question whether it is ‘material’ will be issues which cannot easily be separated.