Bonus issues and purchase of own shares

Section 1026 CTA 2010

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Company is considering an own purchase. Assuming HMRC will otherwise give clearance, all factual conditions are met apart from one - after the buyback the vendor will hold more than 30% of the loan capital and equity (he will hold no shares but will continue to have a pre-existing loan that will breach the limit). We have considered a pre-transaction bonus issue to get round this, but it has been suggested that section 1026 of CTA 2010 would block this. However, our argument is that section 1026 applies only for the purposes of Chapter 2 and should not therefore disturb the capital treatment of the payment, which is in dealt with Chapter 3.

Thoughts, anyone? With thanks in advance.

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By Ruddles
13th Sep 2018 19:54

You should be fine - we've done this on several occasions. Tax Bulletin 21 is your friend.

To expand, though, s1026 does impinge on Chapter 3. If, say, you were to capitalise all of the P&L reserves by way of a bonus issue then, absent s1026, there would be no need for a s1033 clearance. You're relying on HMRC to accept that the payment that would otherwise have been treated as a distribution because of s1026 (s1033(6)) should not be so treated, under s1033.

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