Repayment of Share Capital

Repayment of Share Capital

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My client is sole shareholder/director in a ltd company. The balance sheet looks roughly like this:

Fixed assets £1,000k

Cash £100k

Working capital £100k

TOTAL NET ASSETS £1,200k

represented by:

Share Capital £1,000k

revaluation reserve £500k

P&L reserve £-300k

CAPITAL EMPLOYED £1,200

We'd like return about 90% of the share capital to the shareholder by way of capital reduction/solvency statement. The whole of the share capital was originally subscribed in cash. It is planned to make the by transfer of cash and fixed assets the value of about £900k. My understanding is that this will be classified as a capital receipt opposed to a distribution and therefore not subject to income tax.

Assuming this is correct, what will be the CGT base cost? is it simply proceeds £900k less nominal value subscribed £900k = NIL gain? or is a partial disposal calculation necessary? The value of the company is currently thought to be about £1.8m. So presumably,the value after the proposed repayment would be £900k. So the base cost will be £900k/1800k x £1,000k = £500k,giving a taxable gain of £400k.

Also, if the repayment were to be done by a credit to a director loan account instead of a transfer of assets, would any of the treatment above change, or is a credit to a loan account equivalent to a payment of cash?

Thoughts and guidance much appreciated.  

Replies (8)

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By johngroganjga
04th Oct 2015 19:54

You need to check out the conditions for a purchase of own shares to be treated as a capital distribution, because I don't think your client can possibly meet them.

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By qhas
04th Oct 2015 23:06

Reduction of capital
There are very strict restrictions here. I can't see that what you are proposing meets any of them

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By broadsides
05th Oct 2015 09:29

Reduction of capital

Many thanks for your comments. Just for clarification, what we are proposing to do is not a purchase of own shares, but a repayment of subscribed share capital. We would probably look to repay 90p for each £1 ordinary share, leaving share capital of 1 million shares of 10p each. I agree that as a purchase of own shares this would never qualify for capital treatment. Are there similar restrictions for this scenario?

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By Ruddles
05th Oct 2015 10:15

Part disposal

Not certain, but I think you end up with 100,000 £1 ords rather than 1,000,000 10p shares. (Though the latter can obviously be achieved by subsequent re-designation.)

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By ces.hlb
05th Oct 2015 14:55

Transactions in securities rules

I would be nervous that  s683 ITA 2007 onwards - Transactions in securities rules might apply to tax at least some of the distribution as income.

If you transfer out some of the assets standing at a revaluation, does that crystallise the revaluation reserve and give rise to some distributable profits?

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Replying to Tax Dragon:
By johngroganjga
05th Oct 2015 15:48

Yes

ces.hlb wrote:

If you transfer out some of the assets standing at a revaluation, does that crystallise the revaluation reserve and give rise to some distributable profits?

Yes

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Replying to Tax Dragon:
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By broadsides
05th Oct 2015 16:02

Revaluation reserve

Excellent point, thank-you. Yes the revaluation reserve would be crystallised to a significant extent. Presumably if P&L reserve became positive this would be the basis of a challenge under transactions in securities rules? Is there any mileage in making the payment simply as a credit to director loan account or would this also get caught? 

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By ces.hlb
05th Oct 2015 17:30

I would think a credit to director's loan account would also be the receipt of consideration but you could always apply for clearance?

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