CTM36815 - Particular topics: transactions in securities: Income Tax advantage

ITA07/S687 explains that a person obtains an Income Tax advantage where

  • the person receives relevant consideration that could have constituted a distribution (see CTM15150 on what was a “qualifying” distribution before 6 April 2016), and
  • the amount of Income Tax that would have been payable by the person exceeds the amount of any Capital Gains Tax payable in respect of it.

For transactions occurring before 6 April 2016:

The amount that can be counteracted is limited to the amount that could have been paid to the person by way of a qualifying distribution in any circumstances at the time when the relevant consideration was received. This can include the distributable reserves of a subsidiary.

For transactions occurring on or after 6 April 2016:

The amount that can be counteracted is limited to the amount that could have been paid to the person, or an associate of the person, by way of distribution in any circumstances at the time the conditions in ITA07/S685 are met - see CTM36820 to CTM36823. For this purpose a company’s reserves are treated as increased by the distributable reserves of any subsidiaries.

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 a distribution of £1m.

There is no Income Tax advantage if no Income Tax would have been payable. For example, where there is no liability to higher rates of Income Tax for years before 6 April 2016, or the amount of dividend is below the dividend allowance on or after 6 April 2016.

If in the above example Mr L had no capital losses to cover the gain, so that he was liable to Capital Gains Tax, the amount of CGT paid would reduce the amount of the Income Tax advantage.