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HMRC internal manual

Capital Gains Manual

HM Revenue & Customs
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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.

Step 1

Identify the element of the sale proceeds which will be taxed as a distribution

Sale proceeds     700,000  
Less original capital     100,000  
Distribution     600,000  

Step 2

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


  Disposal proceeds   700,000  
less Section 37 deduction   600,000  
less Acquisition cost (31.3.82 value)   200,000  
    Unindexed loss (100,000)  
less Indexation*   (82,800)  
    Allowable loss (182,800)  
  • 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.