Impairment in value of subsidiary - allowable?

Impairment in value of subsidiary - allowable?

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Company A holds Company B at 100 value.  Company B reduces its share capital by 99 and pays out 99 as a distribution to Company A.  I understand that at this point, Company A will need to write down its investment in Company B, to 1.

I expect that Company's A's impairment will not be deductible somehow (to logically 'match' the dividend not being taxable).  But what piece of legislation effects this?  TCGA s176 (depreciatory transactions) and s31 (value-shifting) seem to only apply the "ultimate disposal", which has not happened.

Is the impairment treated as a disposal for tax purposes?  Or are there similar rules for impairments?

Replies (14)

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By alsion
30th Jul 2015 14:23

Ahhhh perhaps I've found the answer in s177 (dividend stripping).  I should have turned the page.

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By User deleted
30th Jul 2015 14:38

I think you might want to have a read of S1027A(2) of CTA/10

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Replying to Rammstein1:
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By alsion
30th Jul 2015 15:49

S1027A(2) of CTA/10

Interesting - directly distributing share capital is not permitted in the UK, but I suppose this section envisages that it might be in other countries.

It seems overall the exercise is tax neutral (no tax on dividend, no allowed loss on impairment).

Don't think a negligible value claim would work, as the value shifting rules apply without time limit.  Anyway, tax neutrality is all I wanted to ensure.

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By User deleted
30th Jul 2015 14:53

s1027A

Is not directly relevant to the OP's question.

The answer is to wait 6 years and make a negligible value claim. The impairment itself is disregarded for tax purposes.

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By User deleted
30th Jul 2015 16:02

Sorry, but ...

... the negligible value claim does work. Unless the reason for the dividend is wholly or mainly to avoid tax.

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By Steve Kesby
30th Jul 2015 16:15

Is there any loss?

My reading of the OP is that A once subscribed for 100 x £1 shares in B for £100. B Now redeems 99 x £1 shares for £99, generating neither a gain nor a loss on those 99 shares.

A is now left with 1 x £1 share. There is no impairment, no dividend and there is no gain or loss.

Alternatively A once subscribed for 1 x £100 share in B for £100. B now redonimates its shares to £1 shares and repays £99 per share. That is a capital distribution and a part disposal of the share. There is again no dividend. Unless the value of the remaining £1 share is less than £1, there will not be any loss, but there may be a gain.

I don't think CTA 2010, s. 1027A, value shifting, dividend stripping, or depreciatory transactions come into it. It sounds like a straight capital reduction.

I could be wrong, just as it could very well be that the OP is not called Alison, and has not misspelled her own name.

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By User deleted
30th Jul 2015 16:23

Surely

the value of the net assets within the company (ignoring the £99 - whatever it is) doesn't change does it?

 

Why would there be an impairment? Did the customer base go with the 99 shares?

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By johngroganjga
30th Jul 2015 16:32

Isn't this a lot of time and effort for a £99 adjustment?

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By Steve Kesby
30th Jul 2015 16:35

I think John

That the OP's numbers may be illustrative, rather than actual.

Aren't you interested in the answer anyway? What's your view?

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By User deleted
30th Jul 2015 18:27

Let Alsion introduce all the numbers in to the query now!

Edit: I think the OP's currently satisfied with whatever s.1027A says!

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By johngroganjga
30th Jul 2015 16:41

Well there is not necessarily any impairment to be accounted for at all as a result of a reduction in capital.  What are the remaining reserves is the obvious question.  Only if shareholders funds have fallen below the carrying value of the investment does an impairment need to be considered at all. 

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By User deleted
30th Jul 2015 16:46

Dormant?

I think the outcome would be somewhat different for a dormant company that only had £100 in the bank, wouldn't it?

 

Presumably any trade/goodwill negates the requirement for a write down as there is an inherent value in the 1 share that's left.

- where there is no trade what's the position?

 

EDIT: I think John has effectively just answered my question

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By johngroganjga
30th Jul 2015 17:34

Off balance sheet goodwill is of course another factor. My point was more down to earth. What are the net assets of the investee company?

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By alsion
31st Jul 2015 15:33

To answer the queries...
There are many companies to get rid of so not a specific example / set of figures, but talking £millions of share capital+premium, matched by interco debtor balances (if it were £99, the Crown could have that!).

Some of these companies have been around for decades and were used for legacy tax planning and acquisitions (preference shares, deep discounted securities, Bermuda structures...). I don't have complete legal paperwork for how the share capital/premium got there. To avoid any uncertainty over the correct base cost of the shares, I thought best practice was to avoid any capital gains calculations altogether and distribute everything out before striking off. (These companies have mostly never traded / no third party transactions, so strike off should be fine.)

I guess this could be a tax avoidance motive? The aim was just to get a tax neutral result and not have to search for 50 years of legal paperwork.

The investees' carrying values of the companies are approximately equal to net assets. The impairment I envisaged would only arise after dividending out the value in the company, not based on today's balance sheet.

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