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HMRC internal manual

Company Taxation Manual

Distributions: general: bonus issues of securities or redeemable shares

CTA10/S1000 (1) C and D, CTA10/S1136.

A company may make a bonus issue of securities or redeemable shares without receiving new consideration to an equivalent value in return.

In these circumstances, that part of the issue that is not for new consideration is treated as a distribution. The exception is where the bonus issue is a stock dividend within CTA10/S1049 to which ITTOIA05/S410 (2) (3) or (4) apply.

A distribution, which is only a distribution because of CTA10/S1000(1) C and D is a ‘non-qualifying distribution’ and, where the distribution was made prior to 6 April 1999 no ACT was due, and no tax credit is created.

The distribution is non-qualifying because the issue of such securities or shares does not, in itself, transfer value from the company. It is the redemption etc of such securities or shares that results in the transfer of value. This was important when repayable tax credits could be created without value leaving the company. On redemption etc.:

  • CTA10/S1026 (1) and (2) will apply to shares (see CTM15400), and
  • CTA10/S1000 (1) E or F will apply to securities (see CTM15500).

A bonus issue of non-redeemable shares will not normally give rise to a distribution unless either CTA10/S1022 or CTA10/S1026 apply, (see CTM15400 and CTM15420), see CIR v Blott (1921) 8TC101 and CIR v Wright (1926) 11TC181.

Amount of distribution, CTA10/S1003 (3) and CTA10/S1004 (3)

The amount or value of any distribution in the form of a bonus issue is, for redeemable share capital, the excess of:

  • the nominal amount of the share capital issued, and
  • any premium payable, whether on redemption, in a winding up or in any other circumstances

over any new consideration received by the issuing company.

The amount or value of any distribution in the form of a bonus issue is, for any security, the excess of:

  • the principal amount secured, and
  • any premium payable at maturity, in a winding-up or in any other circumstances

over any new consideration received.

Accordingly, a rights issue of securities or redeemable share capital does not give rise to a distribution unless it contains a bonus element. The extent of the bonus element is the amount of the excess referred to above.

For the tax treatment of a non-qualifying distribution in the recipient’s hands see SAIM5130.