IFM40740 - Treatment of certain payments: purchase of own shares

FA22/SCH2/PARA47

When a company acquires its own shares from shareholders, it will often do so at a premium. CTA10/S1024 states that this premium is not treated as a repayment of share capital and will therefore be treated as a distribution under the general rules at CTA10/S1000.

PARA 47 provides that payments made by a QAHC on the redemption, repayment or repurchase of its own shares are not typically treated as a distribution. This treatment will equally apply to the shareholder who receives the premium from the QAHC. An individual shareholder, for example, who holds the shares as an investment would therefore be liable to capital gains tax on the premium rather than income tax.

There is one exception to this rule which is where the payment made relates to ‘qualifying employment-related securities’ with ‘employment-related securities’ taking its meaning from ITEPA03/S421B. Whether such a security qualifies depends on whether the right to acquire the security arises by reason of employment by the QAHC or a company in which the QAHC has at least a 25 percent interest (as long as the person holding the securities is not a fund manager in relation to the QAHC, as defined in PARA 47(5), in which case the securities will not be qualifying employment-related securities)

The purpose of this provision is to prevent management teams of a QAHC’s investee companies benefiting from capital treatment on buybacks. It is common for such individuals to hold equity in the top holding company of a stack of companies set up by a fund on acquiring the investee. However, individuals employed by (or otherwise working for) the fund or its manager may also sometimes become directors of investee companies and their holding companies such that any equity they hold may also be employment-related securities by reference to those directorships. Such individuals are not to be excluded from capital treatment on buybacks if they are fund managers in relation to the QAHC.

PARA 48 denies capital treatment on payments during a cure period in relation to a breach of the ownership condition (PARA 27) made to non-category A investors who have increased their relevant rights in the QAHC (or an enhanced class of the QAHC) on or after the date that the breach occurred. Even where this breach of the ownership condition is fixed within the cure period (PARA 27), and so is deemed not to have occurred, capital treatment is still denied for non-category A investors on payments made before the breach was fixed.

For example, a QAHC has relevant interests held by non-category A investors totalling 31 percent, and has entered a cure period within which that breach might be remedied. An individual shareholder in the QAHC acquires further shares before the breach is cured. Pending cure of the breach, capital treatment would not be available to that individual in respect of the buyback of any of their shares (not just those shares acquired post-breach).