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HMRC internal manual

General Insurance Manual

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HM Revenue & Customs
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Taxation of the investment return: UK dividends and other distributions exemption: dividend stripping: distributions made on or after 1 April 2008: preference share lending

GIM5050 explains that general insurance companies, unlike share dealing companies generally, were not made subject to the 1997 amendment that required them to bring dividends and other distributions from UK companies into their computation of trading income. But they remained subject to the anti-dividend stripping legislation in ICTA88/S736 and the bond-washing legislation in ICTA88/S732.

That legislation was repealed, as part of a simplification measure, for distributions made on or after 1 April 2008. This paragraph describes the replacement legislation, and discusses the remaining risk.

ICTA88/S95ZA: distributions on or after 1 April 2008

This provision combines elements of the repealed provisions ICTA88/S732 and ICTA88/S736. It applies where on or after 1 April 2008 a company receives ‘relevant’ distributions over £50,000 in any accounting period. ICTA88/S208, which exempts distributions from UK companies, is then disapplied so the distribution becomes taxable. To be ‘relevant’ four conditions need to be satisfied:

  • the distribution is made by a UK company, and so would otherwise be exempted by ICTA88/S208
  • as a result of the distribution, the value of the related shares is materially reduced
  • the profit on sale of those shares would be taken into account in computing non-life insurance business profits (hence the application is a little wider than general insurance, and shares which are structural assets (GIM5010) are excluded)
  • either the shares held by the company must amount to at least 10 per cent of holdings in that class, or the period between acquisition and taking steps to dispose of the shares does not exceed 30 days.

The £50,000 limit will ensure that there will be many fewer occasions that the legislation might be applicable compared with its predecessor.

TCGA92/S177 (7), which is the chargeable gains equivalent of the repealed ICTA88/S736, applies to determine whether a holding amounts to 10 per cent. ‘Taking steps to dispose of the shares’ includes the acquisition of an option to dispose of them.

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Exemption for dividends: risk assessment

Mismatches between the tax treatment of distributions and of gains or losses on shares continue to present a risk. A further possibility is ‘preference share lending’, a practice previously open to other financial concerns that was one of the targets of the 1997 amendments to ICTA88/S95. Here, what is in substance a loan at interest takes the form of an investment in redeemable preference shares giving rise to franked investment income. CT&VAT (Technical) Insurance Group wish to learn of significant attempts at exploitation - see the ‘Technical Help’ link on left bar.