CTM15420 | Distributions: general: repayment of share capital - bonus issues - after repayment

From HM Revenue & Customs · Company Taxation Manual

The circumstances leading to the potential abuse in CTM15400 (bonus issue followed by a repayment of share capital) could occur in reverse.

A company could repay share capital and then make a bonus issue of shares. The shareholders would have received cash, but their holdings would be the same as before. Without special legislation, this would not give rise to a distribution.

To deal with such a situation CTA10/S1022 (1), (2) and (3) provide that:

where a company repays any share capital (other than certain preference shares, see CTM15430), and
at or after the time of the repayment the company makes a bonus issue of shares,

then the amount of the bonus issue is a qualifying distribution. However, this is only to the extent that the amount of the bonus issue does not exceed the amount of share capital repaid less any amount of share capital previously paid up on a bonus issue and treated as a distribution under this subsection.

The operation of CTA10/S1022 (1), (2) and (3) is limited by:

CTA10/S1023 (1) and (2) - see CTM15430, and
CTA10/S1049 (3)(b)(i) if the bonus issue was a stock dividend within ITTOIA05/S410 (2), (3) or (4) - see CTM17000 onwards.

The amount or value of the distribution will be:

the nominal amount of the bonus issue up to the amount of the capital repaid,

less

the amount of any new consideration received,

less

any amounts in respect of the same repayment of capital, already treated as distributions by virtue of CTA10/S1022 (3) and (4)

This rule applies to any subsequent bonus issue of share capital. It does not matter whether that capital is of the same class as the share capital repaid. This is unlike CTA10/S1026 (see above, CTA10/S1026 (4)).

Where CTA10/S1022 applies to treat an amount as a distribution, PT Operations should be notified, see CTM15570.

Example

A company repays share capital of £100,000. Subsequently, it issues:

50,000 fully paid £1 ordinary shares at 40p per share, and later
200,000 fully paid £1 preference shares for no new consideration.

The first issue at (a) involves a distribution of:

50,000 x (£1 - £0.40) = £30,000.

The second (bonus) issue at (b) is of shares with par value of £200,000 (200,000 x £1). However, this distribution is restricted to a maximum of the repayment of share capital less the earlier distribution. The amount of this distribution is, therefore:

£100,000 - £30,000 = £70,000.