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HMRC internal manual

Capital Gains Manual

Co.purchases own shares: capital treatment: Condition A – reduction of seller’s interest

CTA10/S1037 Requirement as to reduction of seller’s interest as shareholder

If, immediately after the company purchases its own shares, the seller still holds an interest as a shareholder, it must be substantially reduced. The seller’s interest includes the combined interest of any associates of the seller.

Associates, for the purpose of this part of the Act, are defined under CTA10/S1059. They include, amongst others:

  • A husband and wife living together
  • Civil partners of each other living together
  • Person under age of 18 and his/her parents
  • A person and a company he/she is connected with and includes any company controlled by that company
  • Personal representatives of a deceased person

The seller’s interest is substantially reduced if, and only if, the seller’s subsequent interest after the company purchases its own shares, is not more than 75% of the seller’s prior interest. 

The seller’s prior interest means the total nominal value of the shares owned by the seller immediately before the purchase, expressed as a fraction of the issued share capital of the company at that time.

{#}The seller’s subsequent interest means the total nominal value of the shares owned by the seller immediately after the purchase, expressed as a fraction of the issued share capital of the company at that time.

EXAMPLE

A company has issued share capital of 100 £1 ordinary shares and are held by

Mr Q 30
   
Mrs Q 5
Mr R 15
Mr S 25
Ms T 25
Total 100
  • Mr and Mrs Q are husband and wife
  • Mr R is the son of Mr and Mrs Q and is over the age of 18

The company wishes to purchase its own shares from Mr Q.

Mrs Q is an associate of Mr Q as she is his spouse so her shares are added to Mr Q’s. Mr R is not an associate under CTA10/S1059 as he is over the age of 18 therefore his interest is not added. Therefore the aggregated interest for Mr Q is 35 shares – 35/100 = 35%.

As it is before the purchase of own shares by the company, the prior interest is 35%. Once the company has acquired the shares, they are treated as being immediately cancelled so the share capital is now 70 £1 ordinary shares.  Mr Q has no longer an interest in his own capacity but through an associate, Mrs Q, who has 5 shares. Therefore Mr Q’s aggregate interest post purchase, the subsequent interest, is 5/70 = 7%.

75% of the prior interest of 35% is 26.25%. As the subsequent interest of 7% is not more than 26.25%, the substantial reduction test has been satisfied. 

The minimum amount of shares that need to be repurchased so that the substantial reduction test is met can be calculated using:

A X B

4B-3A

where,

A = nominal value of the seller’s prior interest

B = issued share capital prior to the company purchase of its own shares

The answer should be rounded up.