CG57835 | Small capital distributions: introduction

TCGA92/S122 (2)

A capital distribution is not treated as a disposal if the distribution is small compared with the value of the shareholding, TCGA92/S122 (2). The amount of the distribution is deducted from the allowable cost of the shares. No account is taken of these distributions in deciding whether a taxpayer has used up their annual exempt amount.

HMRC’s long held approach has been that `small' means 5 per cent or less of the value of the shares at the date of the distribution. This view was published in Tax Bulletin Issue 5 from November 1992, and elsewhere. You make the comparison by reference to the value of the shareholding immediately before the distribution.

The question was considered, as a subsidiary point, in the case of O'Rourke v Binks, 65TC165. The judgements in the case indicate that the question is one of fact and degree, and has to be considered in the light of the circumstances in each case. The purpose of the legislation is seen as avoiding the need for assessments in trivial cases, and `to avoid the delay and expense of a full computation on the basis of a part disposal under subs (1) in cases where the delay and expense would be out of proportion to the amount of the capital distribution as compared with the remaining value of the shares in respect of which the distribution was made' (Vinelott J, in High Court). This test would, therefore, require you to have regard to the likely costs of carrying out the part disposal computation, and to the likely tax consequences, in each case.

The `5 per cent test' continues to offer practical advantages, and you should continue to accept that any case which meets that test can be regarded as small. To further reduce the likelihood of assessments in trivial cases, you may also accept that TCGA92/S122 (2) can apply in cases where the distribution is £3,000 or less - whether or not this amounts to 5 per cent or less of the value of the shares in respect of which it is distributed. This approach was announced in Tax Bulletin Issue 27 from February 1997.

You may however see computations where it is suggested that a distribution of more than 5 per cent should be regarded as small, in the light of the facts in that particular case. Or, alternatively, that a distribution of 5 per cent or less is, on the facts, not small. You will need to consider such cases on their merits, by reference to the dicta in O'Rourke v Binks.

There may be circumstances in which the taxpayer wants a small capital distribution to be treated as a disposal. If the distribution is treated as a disposal the taxpayer only loses a proportion of the allowable cost. If TCGA92/S122 (2) applies the allowable cost is reduced by the full amount of the distribution received. This may not be to the taxpayer's advantage. If the taxpayer would prefer to treat a small capital distribution as a disposal, this treatment may be acceptable. You should consider whether to challenge these cases as part of any enquiries into the SA return on the basis of the guidance above on what amounts to ‘small’.

The test whether a capital distribution is small has to be applied to each shareholding. In the case of quoted companies it is likely that the value per share will be the same for each shareholder. In other cases if the position is unclear you may need to ask Shares and Assets Valuation for a valuation.