CheckLists.Tax (beta)
G8. Alteration or cancellation of shares
GENERAL
- Process for reducing share capital
General
- Reduction of capital supported by solvency statement: CA 2006, s.642.
- Court confirmed reduction: CA 2006, s.641.
- See ICAEW Guidance.
Effect of reduction: repayment v. reserve
- Power to repay reduced share capital set out in the 2008 Order.
- "[4.2] If the amount of paid up capital including share premium is reduced then the share capital will be debited with the amount of the reduction. If the reduction was effected by a repayment then the credit will go to cash, otherwise a reserve account will be created which is treated as a realised profit." (ICAEW Guidance)
- If the sum is taken to a reserve, HMRC's view is that any future payment out of that reserve is not a repayment of share capital for tax purposes - see below.
Legislation:
Companies Act 2006, s.641 - 657;
Companies (Reduction of Share Capital) Order 2008 (SI 2008/1915);
Cases:
HMRC manuals:
Commentary:
See also: ICAEW Guidance;
INCOME TAX
Dividends and distributions
- Immediate repayment of cancelled or reduced share capital
General
- If the resolution effecting the reduction specifies that the capital reduced will be returned to shareholder by way of repayment, that is not a dividend and will not be a distribution within s.1000 insofar as it represents repayment of capital on the shares (s.1000(1)(B); CTM15440).
- If, however, it is taken to a reserve and used to pay a dividend, HMRC's view is that it will be a distribution within s.1000(1)(A) (CTM15440).
- Even if not a dividend, HMRC's view is that subsequent payments from the reserve are not repayments of share capital - see below.
Amount of share capital: general
- Includes share premium attributable to new consideration (CTM17510).
- It may be impossible to to identify the issue price (especially for public companies). HMRC may accept a reasonable estimate (such as averaging) (CTM17510).
Amount of share capital: following share for share exchange
- Acquiring company can recognise market value of shares acquired as share capital.
- "It follows that a company can recognise as new consideration the full value of shares in another company that it receives in exchange for the issue of fresh share capital or securities, see CTM15140. So when a company receives shares in an acquired company in exchange for an issue of its own shares, the new consideration received by the first company is the market value of the shares in the acquired company." (CTM17510).
Bonus shares
Legislation: CTA 2010, s.1000;
Cases:
HMRC manuals:
CTM15440 - Distributions: general: repayment of share capital: share capital/share premium reduction;
CTM17510 - Distributions: purchase of own shares: application of the distributions legislation;
Commentary:
See also:
- Subsequent payments out of reserve created by capital reduction
- HMRC's view is that a subsequent payment out of the reserve created by the capital reduction will not be treated as a repayment of capital.
- "Where a distribution is subsequently made from the reserve, no part of this will be treated as representing a repayment of capital for the purposes of CTA10/S1000 (1) B exception (a) in respect of the shares whose reduction or cancellation was the means of creating it. For example, if 5000 ordinary £1 shares are cancelled and their nominal value is taken to a reserve treated as realised profit, any subsequent payment from the reserve will not be treated as a repayment of capital on those particular shares." (CTM15440).
Legislation:
Cases:
HMRC manuals:
CTM15440 - Distributions: general: repayment of share capital: share capital/share premium reduction;
Commentary:
See also:
Transactions in securities
- Reduction in share capital where company had distributable reserves
- 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:
Hunt v. HMRC [2025] UKFTT 538 (TC);
HMRC manuals: CTM36822;
Commentary: TCCR W6.2.10;
See also: Consultation Document 2015;
- Share for share exchange followed by reduction in share capital
- If T sells his/her shares in one company in return for ordinary shares in another company (NewCo):
- Condition A is not met because there is no transfer etc. of assets by a close company.
- Condition B is not met as long as the shares received are not redeemable and share capital is not repaid.
- Unlikely there is an income tax advantage purpose.
- But if T intends to reduce the share capital on NewCo and receive a payment, that will satisfy Condition B (CTM36851).
Legislation: ITA 2007, s.685(7);
Cases:
HMRC manuals: CTM36850; CTM36851;
Commentary:
See also:
- Alteration of rights in a winding up a transaction in securities
- Altering or securing the lateration of the rights attached to securities is a TiS (s.684(2)(d)).
- IRC v. Joiner: T and the minority shareholder agreed to vary T's rights in a liquidation from a share in the surplus assets to a right to receive specific assets (to allow the business to keep going). Held this was a TiS.
Legislation: ITA 2007, s.684.
Cases: IRC v. Joiner [1975] STC 657;
HMRC manuals:
Commentary:
See also:
EMPLOYMENT INCOME TAX
Restricted employment-related securities
Shares acquired for less than MV
- Variation or lifting of restrictions a chargeable event
- Chargeable events include the shares ceasing to be restricted or the variation/removal of any restriction (ITEPA 2003, s.427).
- Associated person must be beneficially entitled to the securities at the time.
Legislation: ITEPA 2003, s.427;
Cases:
HMRC manuals:
Commentary:
See also:
- Variation or lifting of restrictions on forfeitable securities leading to deemed acquisition and notional loan
- Where the original acquisition of securities was within ITEPA 2003, s.425(2), the date of acquisition for the purposes of the notional loan under chapter 3C is deferred until the first chargeable event under s.426.
- Chargeable events include the shares ceasing to be restricted or the variation/removal of any restriction (s.427).
Legislation: ITEPA 2003, s.446Q; s.427;
Cases:
HMRC manuals: ERSM70100;
Commentary:
See also:
- Tax avoidance arrangement affecting employment related securities treated as discharge of notional loan
- If something is done that affects the employment related securities and it is part of a tax avoidance arrangement, the notional loan is discharged (s.446U(1)(c)).
Legislation: ITEPA 2003, s.446U;
Cases:
HMRC manuals:
Commentary:
See also:
CAPITAL GAINS TAX
- Deemed disposal
XX
Legislation:
Cases:
HMRC manuals:
Commentary:
See also:
CORPORATION TAX
Dividends and distributions
- Repayment of capital and payments out of reserve
- On whether a repayment of capital is a dividend, distribution or not, see above in relation to income tax.
- For companies within the scope of corporation tax, a payment from the reserve that is not a dividend is treated as made from profits available for distribution otherwise than by virtue of the reduction (s.1027A).
- Accordingly such a payment can fall within s.1000(1)(B) (CTM15440).
- This allows the distribution to be an exempt distribution.
Legislation:
Cases:
HMRC manuals:
CTM15440 - Distributions: general: repayment of share capital: share capital/share premium reduction;
Commentary:
See also:
INHERITANCE TAX
Closely held companies
- Deemed transfer of value
Close company
- Corporation tax definition (s.102).
- A loan creditor is taken into account when determining whether a company is a close company, but is not treated as a participator for the purpose of deeming a transfer of value (see below).
- Non-resident company that would be a close company if UK resident is a close company (s.102).
Participator
- Corporation tax definition (s.102).
- But excluding a mere loan creditor (s.102).
- Rights and interests in a company include rights and interests in the assets of the company available for distribution among the participators in the event of a winding up or in any other circumstances (s.102).
Indirect participator in close company
-
Legislation: IHTA 1984, s.102;
Cases:
HMRC manuals:
Commentary:
See also:
- Business property relief on deemed transfers
May still be attributable to T's shares
- Transfer of value may be attributable to relevant business property even if T does not dispose of that property
- E.g. T, owning 100% of a company, causes the company to issue new shares to T's child, thereby reducing the value of T's existing shares.
- The transfer of value is attributable to T's shares, those being the only property in T's estate that diminish in value by virtue of the transfer of value - see Nelson Dance §28(iv).
- Another example is where a company makes a transfer of value which is attributed to the shareholders (s.94) - Nelson Dance §28(v) suggests that the value is also attributable to the shares in T's estate.
Legislation:
Cases:
HMRC v. Trustees of Nelson Dance Family Settlement [2009] EWHC 71 (Ch), Sales J;
HMRC manuals:
Commentary:
See also: