Finance Act 1989

136 Value shifting: reductions attributable to distributions within a group. U.K.

(1) After section 26 of the M1 Capital Gains Tax Act 1979there shall be inserted—

“26A Value shifting: distributions within a group followed by a disposal ofshares.

(1) The references in section 26 above to a reduction in the value of anasset, in the case mentioned in subsection (7) of that section, do not includea reduction attributable to the payment of a dividend by the second companyat a time when it and the first company are associated, except to the extent(if any) that the dividend is attributable to chargeable profits of the secondcompany and, in such a case, the tax-free benefit shall be ascertained withoutregard to any part of the dividend that is not attributable to such profits.

(2) Subsections (3) to (11) below apply for the interpretation of subsection(1) above.

(3) Chargeable profits shall be ascertained as follows—

(a) the distributable profits of any company are chargeable profits of thatcompany to the extent that they are profits arising on a transaction caughtby this section, and

(b) where any company makes a distribution attributable wholly or partly tochargeable profits (including any profits that are chargeable profits byvirtue of this paragraph) to another company, the distributable profits of theother company, so far as they represent that distribution or so much of it aswas attributable to chargeable profits, are chargeable profits of the othercompany,

and for this purpose any loss or other amount to be set against theprofits of a company in determining the distributable profits shall be setfirst against profits other than the profits so arising or, as the case maybe, representing so much of the distribution as was attributable to chargeableprofits.

(4) The distributable profits of a company are such profits computed on acommercial basis as, after allowing for any provision properly made for tax,the company is empowered, assuming sufficient funds, to distribute to personsentitled to participate in the profits of the company.

(5) Profits of a company (“company A”) are profits arising on atransaction caught by this section where each of the following threeconditions is satisfied.

(6) The first condition is that the transaction is—

(a) a disposal of an asset by company A to another company in circumstancessuch that company A and the other company are treated as mentioned in section273(1) of the Taxes Act 1970 (transfers within a group: no gain/no loss), or

(b) an exchange, or a transaction treated for the purposes of section 85(2)and (3) below as an exchange, of shares in or debentures of a company held bycompany A for shares in or debentures of another company, being a companyassociated with company A immediately after the transaction, and is treatedby virtue of section 85(3) below as a reorganisation of share capital, or

(c) a revaluation of an asset in the accounting records of company A.

In the following conditions the “asset with enhancedvalue” means (subject to section 26C below), in the paragraph (a)case, the asset acquired by the person to whom the disposal is made, in theparagraph (b) case, the shares in or debentures of the other company and, inthe paragraph (c) case, the revalued asset.

(7) The second condition is that—

(a) during the period beginning with the transaction referred to in subsection(6) above and ending immediately before the section 26 disposal, there is nodisposal of the asset with enhanced value to any person, other than a disposalfalling within section 273(1) of the Taxes Act 1970, and

(b) no disposal of the asset with enhanced value is treated as having occurredduring that period by virtue of section 278 of the Taxes Act 1970 (companyceasing to be member of group).

(8) The third condition is that, immediately after the section 26 disposal,the asset with enhanced value is owned by a person other than the companymaking that disposal or a company associated with it.

(9) The conditions in subsections (6) to (8) above are not satisfied if—

(a) at the time of the transaction referred to in subsection (6) above,company A carries on a trade and a profit on a disposal of the asset withenhanced value would form part of the trading profits, or

(b) by reason of the nature of the asset with enhanced value, a disposal ofit could give rise neither to a chargeable gain nor to an allowable loss, or

(c) immediately before the section 26 disposal, the company owning the assetwith enhanced value carries on a trade and a profit on a disposal of the assetwould form part of the trading profits.

(10) The amount of chargeable profits of a company to be attributed to anydistribution made by the company at any time in respect of any class ofshares, securities or rights shall be ascertained by—

(a) determining the total of distributable profits, and the total ofchargeable profits, that remains after allowing for earlier distributions madein respect of that or any other class of shares, securities or rights, and fordistributions made at or to be made after that time in respect of otherclasses of shares, securities or rights, and

(b) attributing first to that distribution distributable profits other thanchargeable profits.

(11) The amount of chargeable profits of a company to be attributed to any partof a distribution made at any time to which a person is entitled by virtue ofany part of his holding of any class of shares, securities or rights, shallbe such proportion of the chargeable profits as are attributable undersubsection (10) above to the distributions made at that time in respect ofthat class as corresponds to that part of his holding.

26B Value shifting: disposals within a group followed by a disposal of shares.

(1) The references in section 26 above to a reduction in the value of anasset, in the case mentioned in subsection (7) of that section, do not includea reduction attributable to the disposal of any asset (“the underlyingasset”) by the second company at a time when it and the first company areassociated, being a disposal falling within section 273(1) of the Taxes Act1970 (transfers within group: no gain/no loss), except in a case withinsubsection (2) below.

(2) A case is within this subsection if the amount or value of the actualconsideration for the disposal of the underlying asset—

(a) is less than the market value of the underlying asset, and

(b) is less than the cost of the underlying asset,

unless the disposal is effected for bona fide commercial reasons and doesnot form part of a scheme or arrangements of which the main purpose, or oneof the main purposes, is avoidance of liability to corporation tax.

(3) For the purposes of subsection (2) above, the cost of an asset owned bya company is the aggregate of—

(a) any capital expenditure incurred by the company in acquiring or providingthe asset, and

(b) any other capital expenditure incurred by the company in respect of theasset while owned by that company.

(4) For the purposes of this section, where the disposal of the underlyingasset is a part disposal, the reference in subsection (2)(a) above to themarket value of the underlying asset is to the market value of the assetacquired by the person to whom the disposal is made and the amounts to beattributed to the underlying asset under paragraphs (a) and (b) of subsection(3) above shall be reduced to the appropriate proportion of those amounts,that is—

(a) the proportion of capital expenditure in respect of the underlying assetproperly attributed in the accounting records of the company to the assetacquired by the person to whom the disposal is made, or

(b) where paragraph (a) above does not apply, such proportion as appears tothe inspector, or on appeal the Commissioners concerned, to be just andreasonable.

(5) Where by virtue of a distribution in the course of dissolving or windingup the second company the first company is treated as disposing of an interestin the principal asset, the exception mentioned in subsection (1) above doesnot apply.

26C Value shifting: supplementary.

(1) For the purposes of sections 26(1A) and 26A(7) to (9) above, subsections(2) to (6) below apply for the purpose of determining in the case of any asset(“the original asset”) whether it is subsequently disposed of or treatedas disposed of or owned or any other condition is satisfied in respect of it.

(2) References in sections 26(1A)(a) and (b) and 26A(7) to a disposal are toa disposal other than a part disposal.

(3) References to an asset are to the original asset or, where at a later timeone or more assets are treated by virtue of subsections (5) or (6) below asthe same as the original asset—

(a) if no disposal falling within paragraph (a) or (b) of section 26(1A) or,as the case may be, of 26A(7) has occurred, those references are to the assetso treated or, as the case may be, all the assets so treated, and

(b) in any other case, those references are to an asset or, as the case maybe, all the assets representing that part of the value of the original assetthat remains after allowing for earlier disposals falling within theparagraphs concerned,

references in this subsection to a disposal including a disposal whichwould fall within the paragraphs concerned but for subsection (2) above.

(4) Where by virtue of subsection (3) above those references are to two ormore assets—

(a) those assets shall be treated as if they were a single asset,

(b) any disposal of any one of them is to be treated as a part disposal, and

(c) the reference in section 26(1A) to the asset owned at the time of thedisposal by a company associated with the disposing company and the referencein section 26A(8) to the asset with enhanced value is to all or any of thoseassets.

(5) Where there is a part disposal of an asset, that asset and the assetacquired by the person to whom the disposal is made are to be treated as thesame.

(6) Where the value of an asset is derived from any other asset in theownership of the same or an associated company, in a case where assets havebeen merged or divided or have changed their nature or rights or interests inor over assets have been created or extinguished, the first asset is to betreated as the same as the second.

(7) For the purposes of section 26(1A) above, where account is to be takenunder that subsection of a reduction in the value of a relevant asset and atthe time of the disposal by the disposing company referred to in thatsubsection—

(a) references to the relevant asset are by virtue of this section referencesto two or more assets treated as a single asset, and

(b) one or more but not all of those assets are owned by a company associatedwith the disposing company,

the amount of the reduction in the value of the relevant asset to betaken into account by virtue of that subsection shall be reduced to suchamount as appears to the inspector, or on appeal to the Commissionersconcerned, to be just and reasonable.

(8) For the purposes of section 26A above, where—

(a) a dividend paid by the second company is attributable to chargeableprofits of that company, and

(b) the condition in subsection (7), (8) or (9)(c) of that section issatisfied by reference to an asset, or assets treated as a single asset,treated by virtue of subsection (3)(b) above as the same as the asset withenhanced value,

the amount of the reduction in value of the principal asset shall bereduced to such amount as appears to the inspector, or on appeal to theCommissioners concerned, to be just and reasonable.

(9) For the purposes of sections 26 to 26B above and this section, companiesare associated if they are members of the same group.

(10) Section 272(1) to (4) of the Taxes Act 1970 (groups of companies:definitions) applies for the purposes of sections 26 to 26B above and thissection as it applies for the purposes of that section.”

(2) This section shall have effect in respect of any disposal of an asset onor after 14th March 1989, but—

(a) no account shall be taken by virtue of section 26A of the M2 Capital Gains Tax Act 1979 of any reduction in the value of an assetattributable to the payment of a dividend unless it is paid on or after thatdate, and

(b) no account shall be taken by virtue of section 26B of that Act of areduction in the value of an asset attributable to the disposal of anotherasset unless the disposal took place on or after that date.

Marginal Citations

M1 1979 c. 14.

M2 1979 c.14.