Depreciatory transactions

Produced by Tolley

The following Corporation Tax guidance note Produced by Tolley provides comprehensive and up to date tax information covering:

  • Depreciatory transactions
  • Depreciatory transactions within a group
  • Background to the rules
  • When the rules apply
  • Definition of ‘material reduction’
  • Definition of ‘depreciatory transaction’
  • Effect of section 176
  • Depreciatory transactions ― dividend stripping
  • Definitions
  • Effect of section 177

Depreciatory transactions

This guidance note explains the ‘depreciatory transactions’ rules. These are anti-avoidance rules applicable to groups of companies where companies are sold out of capital gains groups.

The depreciatory transaction rules may apply where, prior to a sale of a subsidiary on which a loss arises, either:

  1. an asset was transferred at no gain / no loss between group members

  2. there has been a dividend ‘strip’

The effect of the rules is to adjust losses on a ‘just and reasonable’ basis. They are considered in further detail below.

Depreciatory transactions within a group

Losses which can be attributable to depreciatory transactions arising on the disposal of a subsidiary are adjusted on a just and reasonable basis. This can include eliminating the loss completely but can never result in the loss becoming a gain.

The rules can only apply where a capital loss arises on the sale of a subsidiary from a capital gains group.

Background to the rules

In the absence of special rules, companies would be able to exploit the no gain / no loss transfer of assets within a group to realise capital losses on sale of subsidiaries.

By way of explanation, this may be illustrated by the following diagram (all transactions take place within a one-year period):

Without the depreciatory transactions provisions, a loss of £10m would arise on the disposal of Sub1 Ltd by Holdco Ltd (consideration of £5m less base cost of £15m). The loss is attributable to the previous transfer of £10m assets to Sub2 Ltd, which is a depreciatory transaction under TCGA 1992, s 176. The effect of this is discussed further below.

When the rules apply

The rules apply in relation to the disposal of shares or securities in a company where:

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