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HMRC internal manual

Capital Gains Manual

Small capital distributions: meaning of small

The Revenue’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 the November 1992 edition of Tax Bulletin, and elsewhere. You make the comparison by reference to the value of the shareholding immediately before the distribution.

More recently 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 revised approach was announced in the February 1997 Tax Bulletin. You should apply it to existing cases where the point remains open at the date of publication, 24 February 1997, and to cases arising thereafter.

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.