CTM36835 - Particular topics: transactions in securities: Circumstance C: extraction of company funds and abnormal dividend

See ITA07/S688 for income tax advantages on or after 6 April 2007 or ICTA88/S704C for income tax advantages prior to 6 April 2007 and corporation tax advantages all periods.

Circumstance C is present when a person receives consideration without paying or bearing tax on it as income in consequence of a transaction in which any other person receives an abnormal dividend (see CTM36825) or obtains a deduction in computing profits ( CTM36830).

The consideration must be, or represent the value of, assets available for distribution (or which would have been available but for some action performed by the company concerned) or be received in respect of future receipts or represent the value of trading stock in the company.

Example

Company A has issued 100,000 £1 shares, 60% are held by Ms B and 40% by Company C a company under the control of Ms B. A third party plc agrees to purchase Company A for £10 million to be allocated as decided by the shareholders. The agreement provides for Company A to pay a pre-acquisition dividend of £5m. Ms B waives her dividend rights (£3m). A dividend of £5m is paid to Company C. Company C agrees to sell its 40% shareholding in Company A for £25 per share (£1m). Ms B sells her 60% interest for £150 per share (£9m). Ms B receives no dividend chargeable to IT but a capital consideration of £9m.

Provided that the £5m dividend received by Company C is abnormal ( CTM36826) the tax advantage CTM36820 from transactions in securities CTM36815 will be cancelled because the C circumstance is present. The income tax avoided on £3m which Ms B could have received by way of distribution can be recovered; credit is given by concession for any CGT paid on return of the sum as chargeable gains.