Depreciatory transactions and dividend stripping

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Depreciatory transactions and dividend stripping
  • Depreciatory transactions
  • Depreciatory transactions defined
  • Depreciatory transactions—meaning of material reduction
  • Depreciatory transactions—exception for distributions
  • Depreciatory transactions—application of the rule
  • Dividend stripping

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:

  1. a transfer of assets from one member of a group to another otherwise than for market value, or

  2. the payment of dividends out of profits realised during periods falling before the shares in respect of which such dividends were paid were acquired

and 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 least 10% in the distributing company.

The rules operate by restricting any allowable loss claimed by the seller making the ultimate disposal.

Unlike the value shifting regime, the depreciatory transaction rules cannot:

  1. create or increase a gain, or

  2. impose a tax charge at the time of the depreciatory transaction


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