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Share Premium - Transfer to Distributable Reserves

Share Premium - Transfer to Distributable Reserves

I am looking at doing a capital reduction for a client, and reducing their SPA by £400k, and transferring to distributable reasons.  

For internal political reasons (!), the capital cannot be repaid to the shareholders, I definitely want it to go to the P&L.  The shareholders are all non-resi, so no income tax implications on their subsequent dividends.

My question is, I cannot see any CT ramifications whatsoever. Am I missing anything?

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19th Feb 2016 13:01

So want is the purpose of the
So what is the purpose of the reduction? Wouldn't it be much easier and cheaper for your clients just to sit on their hands and do nothing?

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19th Feb 2016 23:02

Because....
....Dr bank 400k and Cr SPA 400k. And they want to Cr Bank 400k and Dr Dividends 400k

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21st Feb 2016 07:03

But you said in your post that nothing was to be paid out.

Now you say they want to extract £400k in cash!

So which is it?

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20th Feb 2016 17:13

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Sorry if not clear but I meant there are two types of capital reduction - capital repayable to shareholders or capital credited to reserves. I want to do it second way, then declare a divi

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20th Feb 2016 17:49

Why do the shareholders want to receive a dividend rather than a capital repayment?

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20th Feb 2016 20:21

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There are a couple of reasons. I'm just trying to find out if any CT consequences for doing the reserves method.

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20th Feb 2016 22:22

I am no company lawyer, but I don't think there is any such thing as a "reserves method"

If you are unwilling to explain the reasons why your clients want to convert capital into income (the opposite of what most people prefer to do) I am not sure that anyone will be able to help you.

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21st Feb 2016 19:33

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Yes it is very commonplace. I explained in post that client doesn't want to go down the return-of-capital route because I didn't want the thread going off on a tangent.

Not a legal question - it's a tax one.

If anyone out there has experience of doing it this way please let me know. Just looking for comfort that the realised profit credited to reserves is not income, or credit on loan relationship etc etc

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22nd Feb 2016 09:10

Realised profit =/= Income

It's a realised profit in CA terms, but not income in CT terms so I think its OK; http://www.hmrc.gov.uk/manuals/ctmanual/ctm15440.htm covers treatment in the hands of the recipeint

 

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22nd Feb 2016 11:46

That's brilliant thanks

Just what I was looking for!

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22nd Feb 2016 12:21

As per the link above, there are no CT consequences, but the subsequent distribution is taxable on the shareholders as a dividend. If the capital reduction was made by way of a payment for return of capital there may not be any tax consequences for the shareholders either.

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22nd Feb 2016 12:32

Just a guess

The only reason I can think of for the OP's clients' apparently perverse objectives is that some or all of them perhaps bought their shares from the original subscribers at a knockdown price (i.e. less than the capital subscribed) but the company is apparently now in the happy position of not needing all its original capital and being anxious to divest itself of some of it.  So while the company's return of some of its capital would not normally result in a gain if it was being returned to the original subscribers, it may in fact result in a taxable capital gain here.   

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22nd Feb 2016 16:50

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No, there's just a legal agreement in place that they would receive minimum dividend when certain parameters were met. So dividend is the way they want to do it on this occasion. No IT/CGT consequences etc as they are all non-resi and non-dom - not perverse at all! 

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22nd Feb 2016 17:52

John /Portia

Here's one for you

In a 'normal' capital reduction where capital repaid to shareholders - would the share premium be paid to all shareholders pro-rata in accordance with their shareholdings, or would it be repaid to the specific shareholders that injected it originally?  

 

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22nd Feb 2016 19:06

I think it must be pro rata to the number of shares.

To do otherwise would, to say the least, create a bit of a muddle where original subscribers had sold their shares - especially where some had and some hadn't. And it would mean that the value of shares would vary according to the subscription price historically paid on them, and I think we know it doesn't.  And there would be the mother of all muddles when someone who had a holding of shares which had a range of different original subscription prices attached to them made a part disposal!

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22nd Feb 2016 19:32

Overseas tax?

Even if there is no UK tax difference between the two methods of extraction, there could be in the country or countries of residence. Most countries tax residents on their worldwide income and gains. It would be 'perverse' not to consider the 'home' countries tax codes.

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