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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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.
Sorry, but ...
... the negligible value claim does work. Unless the reason for the dividend is wholly or mainly to avoid tax.
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.
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?
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?
Let Alsion introduce all the numbers in to the query now!
Edit: I think the OP's currently satisfied with whatever s.1027A says!
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.
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
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?