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HMRC internal manual

Company Taxation Manual

Particular topics: transactions in securities: definition: income tax advantage

Income tax advantage – ITA07/S687

A person obtains an income tax advantage where

  • relevant consideration is received by the person that could have constituted a qualifying distribution (see CTM15150), and
  • the amount of income tax that would have been payable by the person exceeds the amount of any CGT payable in respect of it.

The amount that can be counteracted is limited to the amount that could have been distributed by the company.

Example

  • Mr L owns all the share capital of both M Ltd and N Ltd
  • Mr L sells his shares in M Ltd to N Ltd for £1m paid in cash
  • If N Ltd had drawn up accounts at the time of the transaction the distributable reserves would have been £2m
  • No CGT is payable by Mr L on the sale of the shares in M Ltd because he had capital losses brought forward sufficient to extinguish the gain.

In the above circumstances, as the distributable reserves at the time of the transaction were £2m, the whole of the £1m payment could have been received by Mr L as a dividend.

The income tax advantage would therefore be equal to the amount of income tax that would have been due if Mr L had received the distribution of £1m.

There is no income tax advantage if none would have been payable, for example where there is no liability to higher rate tax.

If in the above example Mr L had no capital losses to cover the gain, so CGT would have been payable, the amount paid would reduce the amount of the income tax advantage.