CTM36851 - Particular topics: transactions in securities: situations where clearance is unlikely to be given: examples

Example 1

This example considers a reduction of share capital after an exchange of securities or capital reconstruction.

A Ltd has issued share capital of 100 £1 ordinary shares, 100% owned by Ms Y.

Ms Y sets up a new company, B Ltd with one £1 ordinary subscriber share.

B Ltd acquires all the share capital of A Ltd from Ms Y and in exchange issues her with 99 new ordinary £1 shares.  A Ltd is valued at £5million therefore the 99 new £1 ordinary shares are issued at a premium of £4,999,901.

Some time later B Ltd plans to reduce its share premium by £1million and repays that sum to Ms Y.   Ms Y intends to treat the transaction as a part disposal of her shares in B Ltd and to declare a capital gain for tax purposes.

Where the sum of £1 million represents distributable assets of A Ltd or B Ltd, the transaction is unlikely to receive clearance because Ms Y would receive those assets without incurring an Income Tax charge.  In these circumstances, where the amount of Capital Gains Tax paid is likely to be less than the corresponding Income Tax liability, there may be an Income Tax advantage and clearance is not likely to be given.

Example 2

This example considers connected party transactions.

C Ltd has issued share capital of 100 £1 ordinary shares.  These are owned 50% each by Mr and Mrs H.

Mr H decides he wants to cease working for C Ltd and wishes to dispose of his shares.

Mrs H sets up a new company D Ltd with one £1 ordinary subscriber share.

D Ltd acquires all the share capital of C Ltd and gives consideration to Mrs H comprising 99 newly issued £1 ordinary shares in exchange for her 50 shares in C Ltd.  D Ltd gives consideration to Mr H comprising cash, loan notes or other form of debt.

Where the consideration received by Mr H is or represents assets available for distribution and the Income Tax which would be due on such a distribution exceeds any Capital Gains Tax he pays, clearance is unlikely to be given. There may be alternative transactions that could be used to get the same commercial outcome without obtaining an Income Tax advantage, for example C Ltd may be able to purchase Mr H’s shares when profits are available or they could be purchased by Mrs H personally.