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GLOSSARY

Depreciatory transactions legislation definition

Published by a LexisNexis Tax expert

What does Depreciatory transactions legislation mean?

The general effect of the depreciatory transactions legislation contained in ss.176 and 177 TCGA 1992 is to prevent artificial losses at the shareholder tier where value has been extracted at the asset tier, by restricting the allowable loss on a disposal of shares or securities.

S.176 TCGA 1992 deals with depreciatory transactions involving groups of companies. S.177 TCGA 1992 extends these rules to cover depreciatory distributions to a company with at least a 10 per cent interest in the class of shares or securities to which the distribution relates. The loss restriction provided for by the depreciatory transactions legislation is not expressed in terms of any mechanical formula imposed on the company with the loss. Instead, the provisions reduce the allowable loss to such extent as is "just and reasonable". HMRC accept that a loss should only be restricted under s.176 or s.177 TCGA 1992 to the extent that the distribution which depreciates the value of the company the shares in which are subsequently disposed of at a loss is made out of "pre-acquisition profits".

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Capital losses for businesses

FORTHCOMING CHANGE: At Autumn Budget 2024, the Labour government confirmed that it will proceed with the former Conservative administration's plans to abolish the remittance basis of taxation for non-UK domiciled individuals and replace it with a residence-based regime, to commence on 6 April 2025. The government also confirmed its intention to move to a residence-based regime for inheritance tax. The changes will also affect the rules determining excluded property status, the abolition of protected settlements status of offshore trusts, and changes to overseas workday relief. For information on these changes, including draft legislation published with Autumn Budget 2024, see Practice Note: The abolition of the remittance basis of taxation from 2025–26, News Analysis: Autumn Budget 2024—Private Client analysis—International, News Analysis: Autumn Budget 2024—reforming the taxation of non-doms, Autumn Budget 2024 (paras 2.56 and 5.51), OOTLAR (para 1.3) and TIIN: Reforming the taxation of non-UK domiciled individuals..A capital gain that would otherwise result in a charge to tax may be reduced or eliminated if the taxpayer has made capital losses and is...

Depreciatory transactions and dividend stripping

The rules dealing with depreciatory transactions and dividend stripping are anti-avoidance provisions.They target the artificial transfer of value out of a company by either:•a transfer of assets from one member of a group to another otherwise than for market value, or•the payment of dividends out of profits realised during periods falling before the shares in respect of which such dividends were paid were acquiredand which reduce the value of the shares or securities of that company.Without the rules, value could be shifted from one asset to another in order to inflate allowable losses on the ultimate disposal of shares (or securities) in the company whose asset value has been stripped.Most depreciatory transactions take place between companies which are grouped for chargeable gains purposes because they are likely to require a control relationship to exist, and be exercised, to ensure that the non-arm's length transaction takes place.The rules are also extended to apply equally to certain (dividend stripping) distributions by a company to a corporate shareholder with an interest of at...

Discover our 2 Practice Notes on Depreciatory transactions legislation