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HMRC internal manual

Company Taxation Manual

Particular topics: dividend-stripping: exempt bodies: examples

Example 1

A director holds 25% of the shares in a company. On 1 January 1992 he gifts half his shares to a charitable trust which is exempt under ICTA88/S505. On 1 March 1992 the company pays a dividend of £600,000.

The company’s relevant profits for the 12 months accounting period ended on 1 March 1992 are £2.1 million.

Dividend received by trust (12.5% x £600,000) = £75,000.

Relevant profits 1.1.92 - 28.2.92 = 2 / 12 x £2.1m = £350,000.

Attributable to trust (12.5% x £350,000) = £43,750.

Dividends £75,000    
       
Relevant profits £43,750    
Excess £31,250    
Tax credit claimed   £25,000  
Tax credit on excess   £10,416  
Tax credit due   £14,584  

 

ICTA88/S235 (4) assessment 10% x (£31,250 + £10,416) = £4,166.

Example 2

On 1 January 1991 a pension fund (which is an exempt approved scheme under ICTA88/S592) subscribed £3 million for 25,000 ordinary shares in the employing company of which the existing issued share capital was 100,000 ordinary shares.

On 30 June 1991 the company paid an interim dividend of £1.5 million followed by a final dividend of £3 million for the year ended 31 December 1991 on 31 December 1991.

The company’s relevant profits for the year ended 31 December 1991 were £4 million.

Interim dividend

Relevant profits 1.1.91 - 30.6.91 £2,000,000.

Attributable to pension fund (25 / 125) £400,000.

Dividend received by pension fund £300,000.

ICTA88/S235 does not apply and £100,000 tax credit is payable in full.

Final dividend

Relevant profits 1.1.91 - 31.12.91 £4,000,000    
       
less dividend paid 30.6.91 £1.500,000    
  £2,500,000    
Relevant profit attributable to pension fund   £500,000  
Dividend received by pension fund   £600,000  
Excess   £100,000  
Tax credit claimed £200,000    
Tax credit on excess £33,333    
Tax credit due £166,667    

ICTA88/S235 (4) assessment 10% x (£100,000 + £33,333) = £13,333.