Capital Taxes

Question 1

For a company repurchase of own shares …

Answer 1

It must have sufficient distributable reserves available.

The repurchased shares are cancelled.

For the seller, either a capital or income distribution will be deemed to be made.

Question 2

For a sale of shares back to a company, this will be automatically treated as a capital transaction unless the conditions for it to be treated as such are breached …

Answer 2

> Unquoted trading company
Buyback is for benefit of trade (ill health, director conflict etc.)
Individual has owned shares for 5 years
Individual is a UK resident
Shareholding must be substantially reduced (75% of the number of shares before versus after)

If the above is not met, it will be treated as an income distribution.

Question 3

Purchase of company own shares.

Treatment for individual selling the shares …

Answer 3

Income:
If the original subscriber of the shares:

Dividend income =
[(Sale price of share - cost of share) x no. shares] x 38.1% (assuming additional rate payer)
If NRB not used then reduce taxable amount by 2k

Allowable loss =
Proceeds
(Net Distribution) [proceeds less subscription]
=deemed proceeds
(cost)
=gain /loss [NIL]

NIL as subscription = cost

If not the original subscriber of the shares:

Dividend income = as above

Allowable loss = 
Proceeds
(Net Distribution) [proceeds less subscription]
=deemed proceeds
(Cost)
= gain / loss [x 20% tax charge]

  Capital:    If the original subscriber of the shares:

Proceeds less subscription
= gain [less AEA x20%]

If not the original subscriber of the shares:

Proceeds less cost
= gain [less AEA x20%]