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HMRC internal manual

Company Taxation Manual

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HM Revenue & Customs
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Distributions: purchase of own shares: redemption of certain preference shares held by a dealer before 2 July 1997

ICTA88/S95 (4)

ICTA88/S95 (4) applied to redemptions of certain preference shares before 2 July 1997.

It ensured that treatment as a dealer did not apply to:

  • the redemption of fixed rate preference shares,

or

  • the redemption, on terms settled or substantially settled before 6 April 1982, of other preference shares issued before that date

if, in either case, the shares were issued to and continuously held by the person from whom they were redeemed. For this purpose ‘fixed rate preference shares’ were shares which:

  • a company issued wholly for new consideration (see CTM15130),

and

  • did not carry any right either to conversion into shares or securities of any description, or to the acquisition of additional shares or securities,

and

  • did not carry any right to dividends other than dividends which,
      • were of a fixed amount or at a fixed rate percentage of the nominal value of the shares, and
      • together with any sum paid on redemption, represented no more than a reasonable commercial return on the consideration for which the company issued the shares.

A broad view was taken as to what constituted a ‘reasonable commercial return’. For example, an apparently excessive premium on redemption may be reasonable if the relevant shares carry a very low rate of dividend.

Most cases to which this provision applied involved corporate shareholders. Their business often involves the provision of finance by subscription for redeemable preference shares with:

  • a right to small dividends,

and

  • a high premium on redemption.

Such companies would normally be dealers within ICTA88/S95. However, if the shares satisfied the relevant conditions, the premium would continue to be an income distribution in their hands, under ICTA88/S209 (2)(b) (what is now CTA10/S1000 (1) B, see CTM15350).