Buy back of shares acquired at different times

Some shares held for over 5 years, some for under 5. CGT treatment on all shares, some, or none?

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Client wants to sell his shares in a company back to the company.  He acquired the shares by gift from a family member (not his spouse) over a few years, and has held 60% of his holding for more than 5 years and the other 40% for less than 5 years.  I say that he can get CGT treatment on 60% of his sale price (assuming all other conditions are satisfied) and S1035(2) CTA 2010 provides for this, and that the remaining 40% of the price will be taxed as a dividend.  A colleague doubts this and reckons (hopes?) that if any shares qualify for CGT, then the entire holding will, while worrying that it might go completely the other way and the client will get no CGT treatment at all.  

Who is right?  I can't find any worked examples where this particular point is illustrated.  

Replies (20)

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By ireallyshouldknowthisbut
26th Jun 2018 17:40

I was rather hoping someone who knows more than my might have commented on this as its a great question.

Personally I would have not even have considered anything other than splitting the shares along the lines you originally thought of, rather than dealing with them as a single asset pool.

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By Ruddles
26th Jun 2018 21:21

I would suggest that "the " shares (at s1035(1)) is conclusive.

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By SteveHa
27th Jun 2018 07:32

Doesn't s.127 Part IV Chapter II TCGA 1992 cover it?

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Replying to SteveHa:
By Ruddles
27th Jun 2018 11:50

No

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By chicken farmer
27th Jun 2018 09:08

Actually, this point is specifically dealt with at s. 1035(2) CTA 2010 which gives a FIFO rule where shares were acquired at different times

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Replying to chicken farmer:
By SteveHa
27th Jun 2018 10:47

But CTA2010 s.1035 refers back to Part IV Chapter II TCGA1992 for the tax treatment, and TCGA treats them all as acquired at the time of the original acquisition.

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Replying to SteveHa:
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By chicken farmer
27th Jun 2018 11:02

But sub-section (3) of s. 1035, to which you refer, only applies if there has been a previous reorganisation etc. and it says that, if the dates of acquisition would be determined under Chapter 2 of Part 4 TCGA, then that same rule applies in this situation (subject to two exceptions). In other words the new shares are treated as acquired at the date of the acquisition of the old shares.
As we haven't been told of any previous reorganisation, sub-section (3) is not in point.

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Replying to chicken farmer:
By SteveHa
27th Jun 2018 20:35

I don't have access to my Tolleys right now, but wouldn't any previous reorganisation have been the first tranch of the gifts, and so effectively all the later gifts are subsequent reorganisations?

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Replying to SteveHa:
By Ruddles
27th Jun 2018 21:14

No. You need to investigate the meaning of ‘reorganisation’.

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Replying to SteveHa:
Portia profile image
By Portia Nina Levin
02nd Jul 2018 18:22

It sounds like Tolleys is perhaps a little advanced for you, and that you'd perhaps benefit from a weekly publication with pictures.

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Replying to SteveHa:
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By Portia Nina Levin
27th Jun 2018 11:16

No it doesn't s 1035(3) refers to it, but s 1035(3) starts with the word "if".

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Replying to chicken farmer:
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By Portia Nina Levin
27th Jun 2018 10:55

I agree (largely), and I agree with Alistair's interpretation of its effect.

However, it is worth noting that whilst s 1035(2)(a) gives a FIFO rule, s 1035(2)(b) gives a LIFO rule.

So, it seems to me that (assuming the seller's initial interest in the company is less than 75%), if you structure this as two sales of 60% and 40% (less than a 30% of the company) of the holding, then on transaction one the 60% qualifies for capital treatment, and on transaction two, the 40% also qualifies for capital treatment (as the earlier disposal is then deemed to include all of the non-qualifying shares).

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Replying to Portia Nina Levin:
By Ruddles
27th Jun 2018 12:26

I'm not sure that is correct, although agree that is what the legislation seems to say. Because it creates an anomaly - on the first disposal to the company it is the earliest held shares that are taken account of in determining whether 'the' shares sold have been held for 5 years, yet on the second disposal the shares sold on the first are deemed to be the latest held.

I confess to being unable to find anything authorative to support my view, other than commentary in various sources (you know which ones) which suggests that it is only previous disposals to persons other than the company that are covered by (2)(b). Although not expressly stated in the legislation, that approach does make much more sense.

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Replying to Ruddles:
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By Portia Nina Levin
27th Jun 2018 12:47

Shame there isn't a clearance procedure!

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Replying to Ruddles:
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By Tax Dragon
27th Jun 2018 15:52

Well it's right vis-à-vis the 60%. But telling is that everywhere else in Ch3 it describes the event in question as a purchase. The only time the word "disposal" is used is in (2)(b).

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Replying to Portia Nina Levin:
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By chicken farmer
28th Jun 2018 09:53

Yes, that would be my understanding of s. 1035(2) on a strict reading but it could be challenged on 'purposive' grounds. An attempt to buy back in tranches could run the risk of failing the connection test or the substantial reduction test. It would also be necessary to show why the trading benefit test would be satisfied on the first buy back if he or she was to remain a shareholder for a while after that. (lack of funds to complete purchase of entire holding?)

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Replying to chicken farmer:
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By Tax Dragon
28th Jun 2018 18:07

With the 60/40 split, the threshold for failing the substantial reduction test is approx. 78% of the shares. As Portia noted, the connection test means that the cap is 75%.

I agree re strict interpretation, but there's enough doubt for the purposive view to be invoked. The difference in wording I identified would be enough for the court to conclude that the purposive interpretation was as per Ruddles.

The safer approach (given your other points) might be to sell back the 40% first (income treatment), leaving only the 60% which then would be protected per s1035(2)(b).

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Replying to Tax Dragon:
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By Portia Nina Levin
02nd Jul 2018 18:20

Given that if you sell all the shares in one go, the 60% qualify for capital treatment and the 40% don't, and if you take your approach, the 40% don't qualify for capital treatment and the 60% do, how is it the safest approach?

Subject to the valid trade benefit point, why is it better than an approach where the 60% will qualify and it MIGHT be argued that the 40% also qualify?

The difference in wording that you have identified is imaginary. The legislation refers to acquisitions and disposals in relation to the person with the shares and purchase in relation to the company purchasing them. Disposals happen to only be relevant in s 1035(2)(b), which is why it is the only place they are referred to, but that subsection does also refer to acquisitions.

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Replying to Portia Nina Levin:
By Alastair Johnston
16th Jul 2018 15:33

Thanks to all for thinking and debating about this while I nipped off on holiday!

The shareholder has less than 25% of the shares.

There have been no reorganisations of the company.

This is a family company and the family members have fallen out big time. The company has enough reserves and cash to buy all the shares in one go. So although I like the two phase approach and PNL's reading of the interaction of S1035 (2) & (3), I doubt that it will be possible as the relative with the most clout simply won't play ball.

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7om
By Tom 7000
02nd Jul 2018 17:46

There might not be a clearance procedure but when I get stuck I go on Facebook and as HMRC is my friend... incidentally I am the only one they have so far... so they normally answer within an hour

. I message them and then someone really clever replies and tells you what to do

It works a treat....

Try it see what they say...

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