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Reduction in shares

New shares allotted few years ago using large loan acct bal- is it easy to reduce the share capital?

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A new client had a large balance on their Directors Loan Account a few years ago and a very unhealthy looking balance sheet. Their previous advisors allotted 160,000 new ordinary shares and converted the loan account.

They have now had a few successful years and hopefully will continue to do so and are asking whether at some point it is easy to reverse the transaction and go back to just 2 ordinary shares.

I wondered whether this was something anyone can comment on - is it easy to do? (although given I'm in the dark here I would use a co registration agent for the paperwork to make sure it is done correctly) and what are the tax implications (if any) - I suppose the tax element is the main question here as obviously they are wanting to know what this will cost them.

Many thanks in advance I appreciate it.


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27th Mar 2019 23:05

The capital reduction itself is straightforward - involving little more than a resolution and solvency statement.

There are, as you say, tax implications. Potentially, Transactions in Securities could bite (what is the level of distributable reserves?)

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to Wilson Philips
28th Mar 2019 13:12

The first thought is indeed "distribution"... but I wonder. If £160k loan became 160k £1 shares becomes £160k loan, is that anything other than a return of capital? You have yourself reached straight for TiS, suggesting you think it's not taxable as a distribution without those rules. But those rules are anti-avoidance rules. What tax is being avoided? More specifically, is there any "relevant consideration" here?

I would imagine that, if TiS were to apply, it wouldn't need to, because there'd already be a distribution (if you see what I mean).

Irrespective of whether there is a distribution (actual or deemed by eg TiS), there's likely a capital gain, because the shares would be worth more at the end than they were at the beginning, and CGT on transactions between connected parties is based on values, not actual consideration.

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to Tax Dragon
28th Mar 2019 14:18

Tax Dragon wrote:

CGT on transactions between connected parties is based on values, not actual consideration.

Too simplistic, Dragon. Read the section. (Then read s17.)

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to Tax Dragon
28th Mar 2019 15:35

The TiS rules operate quite simply. You calculate the CGT payable on the assumption that the payment is capital. You then work out what the income tax would have been had the payment been treated as an income distribution. If the CGT is lower then you're potentially within TiS. As you say, it's an anti-avoidance provision, and HMRC would need to be able to demonstrate a tax avoidance motive. But one of the factors that they may consider is whether the company had sufficient distributable reserves such that it could simply have paid a dividend instead. It's not cut and dried, I agree, and I'm certainly not saying that on this occasion HMRC would be able to successfully invoke the rules. But one does need to be mindful of Bamberg [2010] TC 00618.

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to Wilson Philips
28th Mar 2019 15:31

Then I shall have to respectfully agree.

And thanks, TD, for the earlier technical correction. I'd point out though that the initial £160k loan was almost certainly worth a lot less than £160k when it was 'converted' to shares. That was, after all, why it was converted.

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28th Mar 2019 13:18


You may find this article useful.

We'd also be happy to help out with the paperwork. The cost will be £170 + vat.


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By chicka
to Adrian Smart
02nd May 2019 09:41

I know its a while since I posted this but appreciate your response - I will message you privately regarding a quote.
Many thanks

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