621 Depreciatory transactions in group

Summary

This section is designed to prevent the artificial manufacture of capital losses within a group of companies. This could be done by draining one company of its assets by transferring them to another group company for nominal consideration (which under the preceding sections would be treated as giving rise to neither a gain nor a loss). The company which had been drained of its assets would then be liquidated at which stage its shares would show a loss, despite the fact that nothing had left the group as a whole. Where the value of the shares or securities of a group company has been materially reduced by such depreciatory transactions, then any loss claimed in respect of the disposal of such shares is disallowed to the extent that is just and reasonable having regard to the depreciatory transactions concerned. An artificial loss could be created by a reverse take-over bid which is also countered by this section. A loss disallowed under this section may be set against a gain realised on the shares of companies which had benefited from the depreciatory transaction.

Details

Definitions

(1) “securities” includes any secured or unsecured loan stock or similar security.

A “group of companies” can include non-resident companies or could consist of all non-resident companies.

Disposal of assets includes the acquisition by whatever method of the goodwill (for example, by asking customers of the finance company to renew their contracts, when they expire, with the latter company) of a group member by another group member.

(2) The disposal of shares includes the deemed disposal and immediate reacquisition of shares which occurs under section 538, where, although the shares have not actually been disposed of, a claim is made that they have become of negligible value.

Depreciatory transactions

The following are considered to be depreciatory transactions —

• (3) the disposal of shares and securities in a company, the value of which have been materially reduced by transfers of assets, at less than market value, from one member of a group of companies to another (transactions which have already been taken into account for the purposes of corporation tax on chargeable gains of the company making the disposal are not to be taken into account also for the purposes of this section),
• (4) in a case where the transaction which materially reduces the value of the shares in or securities of a company is not the transfer of assets at an undervalue, the disposal of shares or securities of a company where the company whose shares or securities are being disposed of (or an effective 75 per cent subsidiary of that company (as defined in section 616)) is a party to the transaction, and at least two of the parties to the transaction are members of the same group,
• (5) a cancellation of shares or securities held by a parent company in its subsidiary company (known as a “reverse take-over”) where, immediately before the cancellation, the shares or securities were the property of another member of the group.

Consequence of depreciatory transactions

(6) loss arising on the disposal, by a member or former member of a group, of group shares or securities which have been the subject of depreciatory transactions is, for the purposes of making a self-assessment, restricted to such an extent as the inspector (or, on appeal, the Appeal Commissioners) considers just and reasonable. Losses on shares owned by a person who has left the group are not to be restricted under the section by reference to transactions which took place while that person was not a group member.

Accordingly, when a company leaves a group but retains a minority interest in a group company which then becomes the subject of a depreciatory transaction any loss on the disposal of the minority holding is not to be disallowed.

(7) In measuring the loss to be disallowed, no regard is to be had to the fact that a depreciatory transaction in relation to the company under consideration has enhanced the value of the assets of the group member that was the other party to the transaction, but that regard may be had to transactions which enhanced the value of the company’s assets but diminished those of other group members.

A loss disallowed under this section may be set against a gain realised on the shares of companies which had benefited from the depreciatory transaction on the disposal of those shares within 10 years of the transaction, to such an extent as appears just and reasonable to the inspector or an appeal to the Appeal Commissioners or the Judge of the Circuit Court.

(8)(a) Where a reduction is made in a loss under subsection (6), any chargeable gain accruing on the disposal of shares in or securities of any other company which was a party to the transaction by reference to which the reduction was made is reduced, for the purposes of making a self-assessment, to such extent that the gain does not reflect any increase in the value of the company’s assets attributable to the depreciatory transaction on the value of those shares or securities at the time of their disposal, where that disposal took place within 10 years after the depreciatory transaction.

(8)(aa) In making an assessment, the inspector (or, on appeal, the Appeal Commissioners) will reduce any chargeable gain to such an extent as appears to the inspector or the Appeal Commissioners to be just and reasonable on the basis that the gain ought not to reflect any increase in the value of the company’s assets attributable to a depreciatory transaction.

(8)(b), (c) The reduction in the later gains cannot exceed the reduction in the earlier loss, and tax which is overpaid as a result of this adjustment must be repaid.

Relevant Date: Finance Act 2021