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HMRC internal manual

Company Taxation Manual

Distributions: purchase of own shares: previous bonus issue

CTA10/S1026 covers the situation where a company makes a bonus issue and subsequently repays share capital (see CTM15400 - CTM15410).

S1026, in appropriate circumstances, brings the repayment of share capital within the scope of the distributions legislation. It provides that:

  • if share capital was issued as paid up otherwise than by the receipt of new consideration, i.e. as bonus

and

  • any amount so paid up does not fall to be treated as a qualifying distribution,

distributions made afterwards by the company in respect of such share capital are not treated as a repayment of share capital except to the extent to which those distributions (and previous relevant distributions) exceed the bonus element not treated as a qualifying distribution.

The operation of CTA10/S1026 is limited in some circumstances.

A company might make a bonus issue, and then carry out a purchase of own shares. In these circumstances, the effect of applying S1026 is that, for the purposes of the distributions legislation, there is no repayment of share capital until the amount of such repayment exceeds the total amount of earlier bonus issues.

Thus, if the total amount of earlier bonus issues exceeds the amount that would otherwise be treated as a repayment of share capital on the purchase of own shares, then the whole of the payment for shares in the purchase of own shares will be treated as a distribution. When considering the restriction to repayment of capital under CTA10/S1026 (2) the bonus element is not effectively spread pro rata amongst all the shares in issue.