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1977 saw the introduction of the general value shifting rule in TCGA92/S30. This does not feature a tax avoidance motive test and, in order to prevent double taxation within a group context, the rule did not apply to the disposal by one company of shares in another company where the reduction in value resulted from the payment of a dividend or from certain asset transfers within a group.

Exploitation of the exclusion, principally in the form of the 鈥渄rain out dividend scheme鈥� (described below) led to the value shifting rule in TCGA92/S30 being extended to group transactions in 1989 but subject to detailed conditions set out in TCGA92/S31 - TCGA92/S34. Further exploitation led to the introduction of TCGA92/31A in 1999.

A simplification review of the capital gains rules for groups of companies was announced in the 2007 pre-budget report and the subsequent consultation process identified the value shifting rule as it applies in the group context as an area of legislation that was seen as excessively complex.

The new rule is based on a simple tax advantage motive test that addresses tax driven transactions, and shares many features with the targeted anti-avoidance rules for corporate capital losses introduced in FA05.

Example of the drain out dividend scheme

The target company Q has a capital gains base cost of 拢20m and owns a single asset now worth 拢70m. Vendor company P wishes to sell Q and the following initial steps are undertaken:

Q acquires a newly incorporated 100 per cent subsidiary R. R borrows 拢70M from P and uses the funds to buy the asset from Q at its market value of 拢70M. This sale is at no gain/no loss for capital gains purposes but Q has made an accounting profit of 拢50M which is available for distribution. Q pays the 拢50M as a dividend to P. The dividend is said to be tax free in the hands of P (for the purposes of the revised TCGA92/S31, that would depend on the provisions of Part 9A Corporation Tax Act 2009).

Following the payment of the dividend Q is worth 拢20M. Q鈥檚 assets are cash 拢20M and its shares in R, but the value of Q鈥檚 shares in R is negligible. This is because the value of the asset acquired by R from Q is matched by an equivalent borrowing. P can now sell the shares in Q to the third party purchaser at market value 拢20M. No degrouping charge arises as a result of the asset transfer because the 鈥渁ssociated companies鈥� exception in TCGA92/S179(2)-(2ZB) applies. See CG45435.

P will receive the full value of the asset of 拢70M from the sale: 拢20M as direct consideration on the share disposal and a further 拢50M in the form of a dividend. It will also receive 拢70m when R repays the loan. If the purchaser provides the funds to repay the loan by way of additional equity then it may obtain a capital gains deduction for the full value of on any subsequent sale.