GIM5050 - Taxation of the investment return: dividends and other distributions: dividend buying

As explained at GIM5150, losses on the disposal of shares enter into an insurer’s computation of trade profits.

A general insurer may, for example, buy a parcel of shares shortly before a dividend or other distribution is paid and sell them shortly afterwards.

It stands to obtain a tax deduction for the fall in value of the shares which results from the making of the distribution, without paying tax on the dividend itself.

As part of any risk assessment process, Inspectors should consider whether anti-avoidance provisions might apply to share transactions undertaken by general insurers. ICTA88/S732 (see CTM36700 onwards) may be particularly relevant if a general insurer participates in a share buy-back after 1 July 1997, or otherwise buys and sells shares within a short period straddling the making of a distribution.

Exploitation of the exemption for dividends

Insurers may be tempted to enter into avoidance schemes designed to exploit the mismatch between the treatment of dividends and gains or losses on shares in the trade profits computation. Submissions should be made where this occurs.

These might include the sort of “preference share lending” by banks that was one of the targets of F2A97/S24, where what is in substance a loan at interest takes the form of an investment in redeemable preference shares because the lender sees a tax advantage in receiving FII rather than interest.