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HMRC internal manual

General Insurance Manual

Taxation of the investment return: UK dividends and other distributions exemption: dividend stripping: distributions made before 1 April 2008

As explained at GIM5150, losses on the disposal of shares enter into an insurer’s computation of trade profits.

A general insurer may, for example, buy a parcel of shares shortly before a dividend or other distribution is paid and sell them shortly afterwards. It stands to obtain a tax deduction for the fall in value of the shares which results from the making of the distribution, without paying tax on the dividend itself, an approach known as dividend stripping.

Financial dealing companies generally, those for whom any profit on disposal of shares is a trading receipt, ceased to be able to benefit from this approach when their UK dividend receipts were brought within the Case I charge by ICTA88/S95. But general insurance companies were excluded by ICTA88/S95 (2A) - see GIM5040. This was because general insurance companies were not considered to be a major risk, and in any case the dividend stripping provisions then at ICTA88/S736 and ICTA88/S704 circumstance B discouraged exploitation (see below). The dividend stripping provisions were repealed, along with ICTA88/S731 to ICTA88/S735 (bond washing) by FA08/S66, as part of an exercise repealing obsolete anti-avoidance legislation. But the substance of ICTA88/S732 and ICTA88/S736 was preserved for general insurance companies in slightly amended form by the insertion of ICTA88/S95ZA by FA08/SCH17/PARA16, in relation to distributions on or after 1 April 2008. GIM5055 explains how the replacement legislation works

ICTA88/S736 and ICTA88/S704 circumstance B: distributions before 1 April 2008

ICTA88/S736 denied a UK resident dealing company relief for any material fall below acquisition value of a holding of at least 10 per cent of the shares in another UK resident company where the fall is attributable to a distribution made in respect of that holding (and so the holder is compensated by the distribution receipt). It applied where the distribution would not be taxable in the hands of the recipient by virtue of ICTA88/S208. The holdings of the company and those of connected persons (ICTA88/S839) were aggregated for the purpose of the 10 per cent test.

The fall in value was arrived at by comparing the value of the security at acquisition with the value at any accounting date or on realisation. ‘Material’ was not defined and depended on the facts and circumstances of the case. Overlapping counteraction, under both the bond washing and the dividend stripping provisions, was prevented by ICTA88/S736 (5). ICTA88/S704 listed the prescribed circumstances in which ICTA88/S703 might apply to cancel a tax advantage. Circumstance B applied to dividend stripping, where a company became entitled to a deduction by reason of a fall in the value of securities in connection with a distribution of profits or of transactions in securities.

Anti-Avoidance Group should be consulted before applying these provisions.