Distributions: general: repayment of share capital - bonus issues
Share premium CTA10/S1025
- a company issues share capital at a premium representing new consideration, and
- the company subsequently makes a repayment of share capital,
the premium is treated as forming part of that share capital for the purposes of deciding the extent of any repayment of share capital. However, the premium is not treated in this way to the extent it has been used in paying up share capital under CTA10/S1115 (3) - see CTM15130.
Subject to CTA10/S1025 (2) a premium paid on redemption of share capital is not treated as a repayment of capital - CTA10/S1024. Special rules apply where an unquoted trading company purchases its own shares, or redeems or repays share capital. This is the ‘purchase of own shares’ legislation at CTA10/S1033 - see CTM17570.
Bonus Issues CTA10/S1026
The general rule in CTA10/S1000 (1) B is that a repayment of share capital is not a distribution. HMRC’s view is that a repayment of share capital includes a redemption and repurchase of shares.
This would be open to abuse in the absence of any other provisions. A company could issue bonus shares, capitalising profits, and then repay them without any distribution arising.
To prevent this, the general rule is modified by CTA10/S1026. This provides that if:
- the share capital concerned was not issued in return for new consideration, and
- the issue of the share capital concerned was not a qualifying distribution,
then distributions the company later makes in respect of such share capital are not treated as repayments of share capital. These distributions are ‘other distributions out of the assets of the company’, and thus within CTA10/S1000 (1) B. But these distributions will not be within CTA10/S1000 (1) B to the extent they (and previous relevant distributions) exceed the share capital issued other than for new consideration (a bonus issue) and the bonus issue was not treated as a qualifying distribution. (See CTA10/S1027).
Thus the effect of CTA10/S1026 and S1027 is that no amount is treated as a repayment of share capital until the amount of such repayment exceeds the total amount of any earlier bonus issues.
CTA10/S1026 does not operate to the extent that the bonus issue fell to be treated at the time of issue as a qualifying distribution, for example under CTA10/S1022.
CTA10/S1026 (1) and (2) are also limited by CTA10/S1026 (3) - see CTM15410.
Where there is a partial repayment, CTA10/S1026 (2) treats the bonus element as repaid in priority to amounts paid up for new consideration.
Same share capital, CTA10/S1026 (4)
For the purposes of CTA10/S1026 (2) and S1027, all shares of the same class are treated as representing the same share capital. Shares are also treated as the same share capital as other shares if they are:
- issued in respect of those other shares, or
- directly or indirectly converted into, or exchanged for, those other shares.
For example, a company may make a bonus issue of ordinary shares to preference shareholders. A repayment of the preference shares could, for the purposes of CTA10/S1026 (2) and S1027, be treated as a repayment of the bonus issue.
CTA10/S1027 makes appropriate provision for successive repayments of the capital after a bonus issue.
A repayment of share capital is normally in cash, but need not be. A company may make a repayment by transferring assets. Any excess of the market value of the assets transferred over the nominal value of the shares repaid, including any appropriate premium, will be a distribution by virtue of CTA10/S1000 (1) G (see CTM15250). However a purchase by a company of its own shares must be for cash.
If the bonus issue was a stock dividend to which ITTOIA05/S410 (2), (3) and (4) applies, (stock dividends received by persons other than companies) the operation of CTA10/S1026 is limited by CTA10/S1049 (3)(b)(ii) - see CTA10/S1026 (5) and CTM17000 .