GIM5040 - Taxation of the investment return: dividends and other distributions: sale of shares as trading receipt

Section 95 ICTA 1988

Before 2 July 1997

An insurance company may be party, as seller, to a purchase by another company of that company’s own shares. Where the sale of those shares would be treated as a trading receipt (see GIM5150), the insurance company is not entitled to a tax credit in respect of the distribution represented by the purchase price.

The distribution is brought within the trade profit (ICTA88/S95 (1)). Share buybacks occurring on or after 8 October 1996 do not in any event give rise to a tax credit (FA97/SCH7/PARA2).

Section 95 treatment is extended to certain other distributions made in connection with transactions in securities and made on or after 26 November 1996 (FA97/SCH7/PARA8 amending ICTA88/S95).

On or after 2 July 1997

ICTA88/S95 was amended in F(No.2) A 1997 in relation to distributions made after 1 July 1997 so as to require “dealers” in shares to bring the actual amount of any distributions that they receive from UK companies into their computation of trade profits.

This rule is, however, specifically disapplied in relation to insurance business (F2A97/S24 (6) inserting ICTA88/S95 (2A)). The treatment of distributions from UK companies in the hands of a general insurance company is therefore the same as for non-financial traders.

Sections 242 and 243 ICTA 1988

Distributions made before 2 July 1997

In order to obtain relief for trading losses and recover the tax credit attached to franked investment income, a claim under ICTA88/S242 was required.

A general insurance company’s trade profits will qualify for the relief given by ICTA88/S243 because franked investment income from shares etc. held as an integral part of the insurance trade would fall within the category of income described in ICTA88/S393 (8) (see GIM5070).

Accounting periods beginning on or after 2 July 1997

No claim can be made under ICTA88/242 or ICTA88/243 for accounting periods beginning on or after 2 July 1997.

Where an accounting period straddles that date there are transitional provisions whose broad effect is to deny the payment of tax credits on distributions made on or after 2 July 1997.