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does a capital reduction payment quality for er

is it a disposal

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A client is going through a capital reduction scheme.

If the shares were sold they meet the requirements to claim entrepreneurs relief.

The capital gain is treated as a part disposal. Will the gain quality for er

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By taxguru
24th Sep 2016 23:09

If the capital reduction is taking place after 05 April 2016, it will be hit by the amended (FA/16) TiS rules (s.684 ITA/07), and ER won't be available.

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Replying to taxguru:
By Ruddles
25th Sep 2016 08:30

Could you be more precise?

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Replying to Ruddles:
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By taxguru
26th Sep 2016 15:11

Well, post 05/04/2015 looks like all capital reductions are subject to TiS clearance.

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Replying to taxguru:
By Ruddles
26th Sep 2016 15:17

That's not really adding anything - care to elaborate? (Because there is a view to the contrary)

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Replying to Ruddles:
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By taxguru
26th Sep 2016 15:27

By specifically inserting it within the TiS rules, that is what the objective appears to be. I can't see anything else.

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Replying to taxguru:
By Ruddles
26th Sep 2016 16:01

Nonsense - the changes to s684 simply put beyond doubt that a capital reduction payment is potentially within the scope of TiS (as it always was, because the list of examples is not exhaustive).

Yes, one may want to go for clearance if there is some doubt as to whether gaining a tax advantage was a main purpose of the transaction - but it is not mandatory and it is certainly a long way from your earlier categorical statement that ER would not be available for a capital reduction.

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Replying to Ruddles:
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By taxguru
26th Sep 2016 16:24

Well, you can continue with all your pedantic nonsense. Yes, it was incorrect to put that way in my first response. Nowhere I said clearance was mandatory.

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Replying to taxguru:
By Ruddles
26th Sep 2016 16:45

Is it being pedantic to quote "ALL capital reductions are subject to TiS clearance"? (my emphasis).

If only you'd have been man enough to admit earlier that you were wrong. At least my 'pedantic nonsense' is correct and, I hope, of more help to the OP than your erroneous non-pedantic 'advice'.

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Replying to Ruddles:
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By taxguru
26th Sep 2016 17:09

It would do a lot good if you could give up picking on posts in pedantic pursuits, and make some meaningful contributions.

And I'm out with that

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Replying to taxguru:
By Ruddles
26th Sep 2016 17:12

So, correcting another contributor's erroneous advice is not meaningful? I'd rather be pedantic, and correct, than broad-brush and wrong. I find that my clients prefer it that way as well.

And with that I too am out.

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By eastangliantaxadvisor
25th Sep 2016 11:38

The facts are as follows:-

share capital 100,000 £1 shares

Value of company - say £1m - after the capital reduction.

Company wishes to reduce the share capital to 100,000 10p shares and receive £90,000.

The base cost of the £100,000 shares is £100,000 as subscribed at par.

Using the a (a+b) principle the allocated base cost to the cash received is £8,256. the gain is therefore £81,744.

Can you claim Er on the gain, as it is a part disposal.

Granted I think that the new anti avoidance rules might be an issue if HMRC argue that the main purpose is the avoidance of tax.

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Replying to eastangliantaxadvisor:
By Ruddles
26th Sep 2016 09:11

My request for further details was actually directed at the previous poster - because I don't believe that capital reductions are automatically caught by the new TiS rules.

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By gbuckell
26th Sep 2016 10:31

For shares, HMRC is happy that each share is regarded as a separate asset so you do not have to use A/(A+B). See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12730

This means that your gain is nil and the question of ER or TIS should not arise.

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Replying to gbuckell:
By Ruddles
26th Sep 2016 11:14

What about TCGA 1992 ss128 and 129?

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By gbuckell
26th Sep 2016 11:42

I am not saying that HMRC's view is correct but why look a gift horse in the mouth?
We had a share capital reduction case in the office a couple of years ago. We had initially used A/(A+B) which generated a capital gain. HMRC raised an enquiry mistakenly thinking that it was a purchase of own shares and did not qualify for capital treatment. We corrected them and then sought to knock out the gain entirely based on their guidance. HMRC accepted.

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Replying to gbuckell:
By Ruddles
26th Sep 2016 11:54

You (and your client) were lucky to find an Inspector that didn't know which part of the guidance to refer to, and who was happy to accept your incorrect treatment - they have specific guidance elsewhere on the treatment of capital reductions (which guidance does tie in with the legislation).

Misapplying the legislation, and citing the wrong HMRC guidance in support, is likely to make the adviser look rather foolish when the Revenue point out the correct guidance.

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By gbuckell
26th Sep 2016 12:03

Point taken. Where is the correct HMRC guidance to be found?

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Replying to gbuckell:
By Steve Kesby
26th Sep 2016 17:00

CG57812 (third bullet), CG51876/CG51875 (best considered in that order), and CG5189P onwards generally, but CG52040 in particular.

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By gbuckell
26th Sep 2016 17:11

Thank you Steve. I agree that the statute seems quite clear but it would still seem that HMRC practice offers the route as I described. See https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg51893

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Replying to gbuckell:
By Steve Kesby
26th Sep 2016 18:12

Isn't CG51893 dealing with a different point though, Graham.?

Essentially it seems to be simply saying that if you have X shares with a market value of £Z and in the reorganisation you sell Y shares for £Z each, then however you do the calculation:
- A/(A+B) on the holding of X shares,
- s. 129 on the holding of X shares, or
- a disposal of Y shares out of a total holding of X shares, you will come to the same result, because numerically it is the same calculation.

It's "in practice" point then seems to apply where the difference between what is received for the Y shares isn't dissimilar to Y x £Z.

In the OP's situation there is quite a noteable disparity, because £90,000 is being received (for 90% of the old holding) and the new holding is worth £1 million.

Incidentally, because it is 90p per share that is being repaid you get a part disposal even if you treat each share as a separate asset.

I have to admit though, this isn't something I've thought about before today. I'd have said that there was no gain if this thread hadn't made me look at the points raised.

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By eastangliantaxadvisor
26th Sep 2016 20:05

Thanks everyone

So I think we are agreed there is a gain - but is it a "disposal" for the purposes of ER.

s169 says "a disposal of one or more assets consisting of (or of interests in) shares in or securities of a company."

Although we have a part disposal, is it enough to day that "it is a disposal". I could see HMRC arguing that there has been no disposal, as the same number of shares have been retained. Hence why I asked the question?

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By Steve Kesby
27th Sep 2016 10:35

Yes. There is a disposal. You have disposed of a 90% interest in each share. TCGA 1992, s. 21 refers.

Assuming that condition A in s. 169I(6) is satisfied, I can't see any reason why ER shouldn't be available, subject to the (remote) possibility of a TiSsue.

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