G8. Alteration or cancellation of shares

- Reduction in share capital where company had distributable reserves

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- Repayment of share capital is a transaction in securities (s.684(2)(e)).

- If the company is a close company (or would be if UK resident) and had distributable reserves at the time of the reduction of share capital, the repayment of share capital is or may be Condition A relevant consideration (CTM36822).

- HMRC say that if the company has sufficient distributable reserves, the exclusion in s.685(7A) is "unlikely to apply" although "sometimes it might be demonstrated that such a return represents subscribed capital only" (CTM36822).

- in Hunt, a sum paid by way of a reduction in capital (share premium created upon purchase of subsidiary by way of share for share exchange), was held to represent the value of assets available for distribution simply because the company had sufficient distributable reserves to have distributed that sum (§40).

- See other conditions in G1: Disposal of shares.

- Artificial creation of share capital in order to reduce it (e.g. insertion of holdco), may be caught.

- IRC v. Brebner - a group of shareholders borrowed money to purchase the remainder of the shares in the company to prevent it being taken over by another company. The target company subsequently increased its capital by capitalising reserves and then reduced its capital and made payments to the purchasers which were used, in part, to pay off the debt. Held that obtaining a tax advantage was not a main purpose. 

 

Legislation: ITA 2007, s.685; 

Cases:

IRC v. Brebner 43 TC 705; 

Hunt v. HMRC [2025] UKFTT 538 (TC); 

HMRC manuals: CTM36822;

Commentary: TCCR W6.2.10; 

See also: Consultation Document 2015; 

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