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HMRC internal manual

Capital Gains Manual

Reorganisations of share capital: compensatory open offers (COOs): tax treatment of compensation payments

The provision of compensation payments to non-subscribing shareholders is a key feature of open offers with compensation (see CG51757). Companies may try to ensure that their shareholders suffer no tax charge at the time of the open offer. A common way of doing this is to arrange matters so that cash compensation payments are capital distributions within the scope of TCGA92/S122 in the hands of the non-subscribing shareholders, and furthermore that they are ‘small’ so that subsection (2) applies. For guidance on the meaning of ‘small’ in this context see CG57835+. Guidance on TCGA92/S122 is at CG57800+.

A compensation payment will by definition be ‘in respect of’ the shares in the company, and so the first condition in TCGA92/S122(1) will be met. Whether the payment is also a capital distribution will depend on the facts of each case. It is likely that it will be, but you must have regard to the definition of ‘capital distribution’ (see CG57810+) and hence the meaning of ‘distribution’ given the facts of each case.

The third condition in TCGA92/S122(1) is that the capital distribution must be received by the share-holder ‘from the company’. In order to decide whether this condition is met you will need to trace the path taken by the compensation payment before it reaches the shareholder, and to understand the functions of each of its beneficial and legal owners. It may be that the payment never in fact passes through the company’s own hands, but that an agent or trustee receives the premium of the rump share subscriptions (see CG51757) and then is compelled by the company’s instructions or the terms of a trust to pay the appropriate amounts to shareholders. Where the agent or trustee has no discretion in this regard, and no-one but the company ultimately directs their actions, you may accept that the distribution is received from the company for the purposes of TCGA92/S122(1). In cases of uncertainty, or where this view is contested, please refer your case with evidence of the form of the transactions, to Specialist PT (CG Technical Group) in Solihull.