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Share Capital Reduction

If a company consolidates 80,000 £1 shares into 10p shares what is the correct tax treatment if the £72,000 is paid to shareholder?

Is this a Capital Gain with a proportion of the original cost of the shares included?

Is the money transferred to distributable reserves to paid out as dividends in future?

Or can the money be released to the shareholders through loan accounts or as cash?

Any thoughts would be most welcome.


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03rd Jun 2011 11:59

Pandora's Box

On the face of it in a straight repayment of capital, so you might debit share capital credit shareholder loan account, however, this comes with the biggest health warning possible as this is potentially quite an unbelievably tricky question.

As you are probably aware, the tax rules on distributions are complicated. Broadly a distribution of capital made as a result of a capital reduction may be treated as income or capital it depends on the recipent or the nature of the payment! The point of confusions is that CTA 2010 does not list a repayment of share capital as exempt so we might presume that it is capital but then again we might presume that it is not specifically exempted it must therefore be income. That sounds mad, but then go over the repurchase of own share rules and you will not that you have to go through a lot of hoops.

It gets no better if you read the decision in First Nationwide v HMRC, as HMRC tried to argue that a distribution paid out of a share premium account was capital and the tribunal found otherwise. The only trouble is that the rules for companies are not the same as for individuals.

At the end of all this are the transactions in securities rules, so even if you claim capital treatment HMRC might, circumstances and facts permitting serve a counteraction notice and then you will find that you have income treatment after all.

Conversely, it may be very straightforward and there may be no issues, but without being able to thoroughly investigate the background (such as when and where the shares were acquired and the reasons for the transaction) I am unwilling to stick my neck out and give you an answer although I might recommend tax clearance is obtained. You can contact me via my website if you would like me to take a fuller look though.

Virtual tax support for accountants:

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By DMGbus
03rd Jun 2011 13:35

Clearance proceedure

There is a procedure for a company to purchase its own shares.

Normally professional advice from a tax specialist in this field would be sought and as a result the sort of response obtained back from HMRC would be along the lines of...

"Section 701 ITA 2007 - Transactions in Securites

I am authorised to say that the Board are satisfied that..."

Done the correct way the payment to the shareholder might be Capital rather than income.  It depends upon the facts of the case and what reasons are put forward to HMRC to justify the proposed transactions.

Not my field (too specialiast for me, although it sounded simple enough when recently explained to me by a colleague who does a lot of this stuff).



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