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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Reorganisations of share capital: bonus issue: shares held in treasury

From 1 December 2003 it is possible for listed companies incorporated in the United Kingdom to repurchase their own shares and hold them in treasury (CG50209). (For this purpose ‘listed’ includes shares dealt in on the Alternative Investment Market (AIM) of the London Stock Exchange.) While shares are held in treasury, their rights are suspended, and for most tax purposes they are treated as if they had been cancelled (FA2003/S195(4)(b)).

If a company that holds some of its own shares in treasury makes a bonus issue (see CG50290) in respect of shares of that class, it may make the issue in respect only of the shares of that class which are not held in treasury, or it may issue bonus shares to itself as well as to the other holders of shares of that class. Whether or not it issues bonus shares to itself in respect of the shares held in treasury, the bonus issue can qualify as a reorganisation under TCGA92/S126(2)(a).

Bonus issue - shares not issued in respect of shares held in treasury

If the company chooses not to make a bonus issue in respect of the shares held in treasury, the general rule in FA2003/195(4)(b) that shares held in treasury are treated as though they have been cancelled means that the bonus issue will be a reorganisation because it satisfies the condition in TCGA92/S126(2)(a) that bonus shares must be issued pro rata to the holdings of shares of the class in respect of which the bonus issue is made.

Bonus issue - shares issued in respect of shares held in treasury

Alternatively, in the case where a company issues bonus shares to itself in respect of shares in treasury and to the other holders of shares of the same class in respect of their holdings, FA2003/S195(6) provides that the shares held in treasury in respect of which the bonus shares are issued to the company itself can be considered to be ‘original shares’ for the purposes of TCGA92/S126. So in this case the bonus shares, including those issued in respect of shares held in treasury, are issued pro rata to original holdings of shares, and the bonus issue is a reorganisation of the company’s share capital as defined in TCGA92/S126(2)(a).

Rights issue

Where a company makes a rights issue the Companies Act does not allow rights to be granted in respect of any shares held in treasury. For the transaction to qualify as a share reorganisation within TCGA92/S126 the allotment of shares in the rights issue must be in proportion to (or as nearly as may be in proportion to) the shares in issue, see CG51746. As the shares a company holds in treasury are treated as if they had been cancelled and are not part of the company’s issued share capital, if the company grants rights in proportion to the shares not held in treasury the transaction will be a reorganisation of share capital within TCGA92/S126.