CGT37 Purchase of Own Shares Flashcards
A purchase of own shares will be treated as an _______ distribution unless the _________
an income distribution
unless the conditions for capital treatment are met.
Under the income treatment…..
the receipt by the individual is treated as a dividend and
taxed at 8.75%, 33.75% or 39.35%, after a tax-free dividend allowance of £2,000.
If income distribution, the dividend will be….
the amount received on the share buy-back less the original subscription price of the shares
If an income distribution there will also be…
a capital gains computation on the disposal of the shares. The sale proceeds for capital gains tax purposes are the original subscription price of the shares.
If the individual was the original subscriber this will result in a capital gain of nil. If the individual was not the original subscriber, a capital gain or loss may arise.
Under the capital treatment….
the disposal gives rise to a capital gain which is taxable on
individuals at 10% or 20% and may qualify for business asset disposal relief.
The capital treatment only applies where:
- unquoted trading company
- the repurchase is wholly or mainly for the benefit of the trade;
- bought back from a UK resident vendor who has held the shares for 5 years
- reduces vendor interest in the company by 25%; and
- the vendor not connected after buy-back
To qualify for capital treatment the vendor must reduce their interest by….
at least 25%
How long must the vendor have held the shares to qualify for capital treatment?
5 years. 3 if acquired on death.
What conditions must the vendor meet for capital treatment?
- must be UK resident
- must have held the shares for 5 years (or 3 if acquired on death)
- must not be associated with the company following buy back
What conditions must the company meet for capital treatment?
- unquoted trading companies which are not 51% subsidiaries of a quoted company, or by unquoted holding companies of a trading group;
- buy back must be wholly or mainly for the purpose of the trade
What special condition also triggers capital treatment?
if the money paid is used wholly or mainly to discharge an inheritance tax liability arising as a result of a death and without the share repurchase the payment of this liability would have caused undue hardship.
What is a trading company for this purpose?
A trading company for this purpose is a company whose business consists wholly or mainly (ie greater than 50%) of carrying on a trade or trades.
What is also taken into consideration for the substantial reduction and the connection tests?
The holdings of any associates are taken into account for both the substantial reduction and the connection tests which are required for the capital treatment to apply.
The definition of associates here includes spouse or civil partners who live together and children aged under 18.
What about treasury shares?
Treasury shares are shares repurchased by the company but not cancelled. For tax purposes, the shares are treated as if they were cancelled.
If treasury shares are sold, the company is treated as having issued new share capital.
Where the amount paid for the treasury shares is less than nominal value, the shares will be treated as having a nominal value equal to the amount of consideration received. If the
shares are sold for more than nominal value, they will be treated as issued at a premium.
