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HMRC internal manual

Capital Gains Manual

From
HM Revenue & Customs
Updated
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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.

EXAMPLE

  • 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  
      100,000  
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.