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Reduction of share capital

Reduction of share capital - payment from share premium

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I have a situation where shareholders have subscribed at different times, for differing amounts, as well as for different classes of shares. Not enough reserves available for the level of distribution that is wanted and so they are looking to tap into the share premium account. 

The proposal is that all shareholders get the same amount per share, regardless of what they paid.

Note: A clearance will be sought.

If a company decides to repay capital to shareholders, does it have to repay to those shareholders whose share subscription created the share premium account or can it pay the money to holders who subscribed for their shares at par only?

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By johnt27
20th Nov 2020 12:28

Are you paying a distribution (dividend), doing a capital reduction or a buy back? Not entirely clear what you are trying to achieve from the question.

I think you want to know if you do a capital reduction, resulting in the share premium being reclassified to P&L reserve, if there is then any restriction on which shareholders can receive any resulting dividend?

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Replying to johnt27:
Lone Wolf
By Lone_Wolf
20th Nov 2020 12:48

No, if it went to P&L reserve I'm satisfied that there is no restriction on what shareholders can receive dividends.

However the aim is to achieve a capital distribution to shareholders if possible.

They are 1p shares, so a reduction in the nominal value f the shares is out of the question. There's going to have to be some form of share cancellation to enact this. All shareholders will come out with the same % holding as they began with.

Payment to shareholders is going to be made immediately, without transferring through a reserve, which should aid us in our aim of capital treatment (see last paragraph of CTM15440) - although we'll see what HMRC think when we right for clearance.

My question is - when it doesn't go though a reserve, does it have to be repaid in proportion to the amounts subscribed by the shareholders?

We could have a situation where one person has subscribed 1p for a share, but is receiving a payment of £20 via this. That may be alright and it's just a case the excess is taxable under TCGA 1992.

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Replying to Lone_Wolf:
Psycho
By Wilson Philips
20th Nov 2020 12:51

I think you'll find that the excess is not taxable under TCGA 1992.

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Replying to Wilson Philips:
Lone Wolf
By Lone_Wolf
20th Nov 2020 12:55

Is there a specific section that says that, or are you just assuming TiS will apply?

The company does not have the P&L reserves to pay the amounts desired. My reading of CTM15440 is that the payment would be deemed to be a capital distribution, and may be taxable under TCGA 1992 s122.

TiS may kick in and say income treatment still applies, but then that's what the clearance is for.

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Replying to johnt27:
Psycho
By Wilson Philips
20th Nov 2020 12:49

Why would they want to reclassify to P&L reserve (assuming that we are talking about non-corporate shareholders)?

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Psycho
By Wilson Philips
20th Nov 2020 12:47

The share premuim can be used to make a payment to all shareholders. Although clearly anyone that receives more than they paid will be liable to income tax on the excess.

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By The Dullard
20th Nov 2020 13:02

If you pay any shareholder more than they subscribed for the shares, then for tax purposes, the excess is a dividend.

And I think that unless you structure your capital reduction otherwise than as returning excess amounts subscribed for shares above par value, then you would have to do as johnt27 is suggesting and just reclassify the excess as distributable reserve, with the effect that any subsequent distribution out of the reserve is taxable as a dividend.

Consider put a new holding company on top. Reduce capital in the current company by reclassifying share premium as distributable reserve. Exempt distribution up to NewHoldCo who has a share premium account that is now pro-rata to the shareholders. Might not get TiS clearance though.

Maybe transfer the trade up and do a name swap later, and then dump the current company by strike off to eliminate the holding company structure. The alternative would be to liquidate the NewHoldCo after and distribute the shares in the current company, but it will be more costly and it looks more dodgy. It will also need a TiS clearance. No need to have any current plans about how to tear it down just yet though.

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Replying to The Dullard:
Psycho
By Wilson Philips
20th Nov 2020 13:16

TiS clearance would almost certainly not be given. And in light of recent discussions, s138 clearance may be equally hard to obtain.

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Replying to Wilson Philips:
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By The Dullard
20th Nov 2020 13:33

"Recent discussions"? Are you talking about what seems to be HMRC's current practice of buying themselves an extra 30+ days by raising questions on commerciality?

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Replying to The Dullard:
Psycho
By Wilson Philips
20th Nov 2020 13:52

Yep. I'm not saying that one wouldn't eventually succeed, but I'd be interested to know what the commercial purpose could be in this case. (Yes, I know, it is usually possible to fabricate something to support the application but it's not jumping out of the page at me here.)

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Replying to The Dullard:
By SteveHa
20th Nov 2020 13:59

This sounds very much like a no commercial reason transaction, or where the main purpose is to avoid tax. GAAR, anyone?

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Lone Wolf
By Lone_Wolf
20th Nov 2020 13:48

I've now gone through CTA 2010 Part 23 - Company Distributions and am in agreement with @The Dullard and @Wilson Philips. We can distribute in whatever portions we want, but any excess over the initial subscription price is going to be a distribution subject to income tax.

We can obtain capital treatment on one class of share. The other classes will be stuck with income treatment - that's what happens I guess when you only pay 1p for your shares.

Thanks for the contributions.

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Lone Wolf
By Lone_Wolf
20th Nov 2020 18:51

Last question if anyone is still around.

Is the subscription price pooled the same as we would the base cost when applying the share pooling rules.

Say someone sets up the company – subscribes for 100 £1 shares.

Laster they invite 3 investors and issues a further 100 £1 shares, bringing in £100,000 (original owner acquiring 25% of these)

So we’ve got £200 of share capital, and £99,900 in share premium.

In my mind, original shareholder has a pooled subscription price of £25,100 (£200.80 per share), and the other 3 of £25,000 (£1,000 per share).

Taking this a step further, say they wanted to enact a reduction of share capital, and distribute £80,000 equally. Capital treatment desired.

Does the fact that the original shareholder has a subscription price per share of £200.80, and is getting and equivalent of £400 per share back, mean the £199.20 excess is income? Even though he has contributed capital in excess of the £20,000 he is getting back.

I take it they couldn’t simply cancel 1 share each, and distribute that £80,000. They’d have to cancel a proportionate number of shares compared to share premium distributed.

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