CG46680 - Depreciatory distributions in respect of 10 per cent holdings

TCGA92/S177

The depreciatory transactions rules originally introduced in FA68 were extended by FA69 to cover depreciatory distributions in respect of 10 per cent holdings. The rules for 10 per cent holdings are now in TCGA92/S177. These rules restrict losses where

• one company `the first company' has a holding in another company `the second company'
• the holding represents at least 10 per cent of all holdings of the same class in the second company
• the first company is not a dealing company in relation to the holding
• there is a distribution to the first company in respect of the holding which materially reduces the value of the holding.

If these conditions are satisfied the depreciatory transactions rules in Section 176 apply as if the distribution were a depreciatory transaction, and as if the companies concerned were members of the same group. As with distributions paid between group members, you should only restrict a loss under Section 177 to the extent that the distribution is made out of pre-acquisition profits, see CG46580+.

The Section 177 loss restriction applies on a disposal by the first company, or by any other company which acquires the holding on a no gain/no loss disposal within TCGA92/S140A, TCGA92/S171 or TCGA92/S172.

There is a loss restriction under TCGA92/S177 where the depreciatory distribution takes place after 29 April 1969, unless the shares or securities in question are deemed to be sold and reacquired at market value on 31 March 1982 under the rebasing legislation. In this case the effect of Section 177(4) is that there is a loss restriction only where the distribution takes place on or after 31 March 1982.

TCGA92/S177 (5) defines a company as `a dealing company' in relation to a holding if a profit on the sale of the holding would be taken into account in computing the company's trading profits. Holdings of shares or securities of different classes are treated as separate holdings by Section 177(6). So too are holdings of securities which differ in their entitlements or obligations. In applying the 10 per cent test there is provision for aggregating holdings of connected persons in TCGA92/S177 (7).