Co.purchases own shares: treated as distribution: not UK resident cos
The disposal proceeds should be reduced by the amount of any sum which has been charged to Income Tax, TCGA92/S37. This may have the effect of giving the taxpayer a significant loss.
- In 1979 Mr Lewis subscribes £100,000 for 100,000 £1 ordinary shares in Valley Electronics Ltd.
- March 1989 the company purchases Mr Lewis’ entire holding of shares at a price of £7 per share.
- SAV agree the 31 March 1982 value of the shares is £2 per share. Mr Lewis has made an election under TCGA92/S35 (5) out of the kink-test.
You compute the capital gain as follows.
Identify the element of the sale proceeds which will be taxed as a distribution
|Less original capital||100,000|
Reduce the sale proceeds by the amount which will be taxed as a distribution thencalculate the gain or loss in the normal way.
Capital Gains Tax computation
|less||Section 37 deduction||600,000|
|less||Acquisition cost (31.3.82 value)||200,000|
- March 1982 - March 1989 0.414
In 1988-89 Mr Lewis would have a Higher Rate Income Tax liability of £120,000 on the distribution.
The company would have to pay ACT on the distribution but it may be able to set this off against its mainstream Corporation Tax liability.