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Shareholders tax after share capital reduction

Capital Gains Tax on subsequent sale of company

New client.  Company had a share capital reduction 6 years ago to produce positive reserves. It seems that no initial payments were made to shareholders and we expect that we'll find out that all subsequent payments to shareholders were treated as dividends on their tax returns in subsequent years. The question is, if the company is sold now what is the base cost of the remaining shares?

Cearly there was a "disposal" of shares when the capital reduction took place but there was no consideration. So is there a capital loss which is carried forward (there have been no gains since then) or do we treat the initial full amount of the share capital subscribed for as the base cost?  (Net result should be the same whichever is correct)

Or have we missed something!?

Any help would be  most appreciated!

 

 

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11th Jan 2019 14:32

The taxation of share capital reductions is a complex area and before proceeding with such a capital reduction the directors and shareholders should obtain suitable taxation advice.

In summary it is unlikely that the capital reduction will give rise to taxable income but there may be a disposal for capital gains purposes. Where the reduction is achieved by a reduction in the nominal value or unpaid amounts this is not a disposal of an asset so has no tax implication. However, where shares are cancelled then there may be actual or deemed proceeds, even where no consideration is paid, of the market value of the shares which will be subject to capital gains taxation.

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By ctaguy
13th Jan 2019 13:39

Newstart wrote:

Cearly there was a "disposal" of shares when the capital reduction took place but there was no consideration.

The asset has arguably diminished in value, but this does not appear to be a disposal for tax purposes. S122 TCGA 1992 “(1) Where a person receives or becomes entitled to receive in respect of shares in a company any capital distribution from the company (other than a new holding as defined in section 126) he shall be treated as if he had in consideration of that capital distribution disposed of an interest in the shares.” Therefore, in the absence of receiving anything, there is no deemed distribution. Base cost is undisturbed. But as mentioned by the other member above, detailed advice should be sought.

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