CTM15140 - Distributions: general: new consideration

ICTA88/S254 (1), (5), (6), & (7)

When someone pays cash to a company for the issue of shares, that cash from the point of view of the company is new consideration for that share issue.

The full meaning of new consideration is wider than the simple example above. Section 254 gives a basic definition of new consideration as ‘consideration not provided directly or indirectly out of the assets of the company’.

The consideration need not necessarily be cash. It can include other assets, including shares in another company.

Section 254 specifically excludes from the definition of new consideration amounts retained by the company on capitalising a distribution.

ICTA88/S254 (5) covers the situation where share capital has been issued at a premium, and the premium represents new consideration. In these circumstances if any part of the premium is later applied in paying up further share capital, then it is treated as new consideration for that share capital also. However, this treatment does not apply to any part of the premium that has been taken into account under ICTA88/S211 (5), to enable a distribution to be treated as a repayment of share capital (see CTM15400).

ICTA88/S254 (6) and (7) restrict, in certain circumstances, the amount treated as new consideration. The circumstances are where the new consideration is derived from:

• share capital in the company,
• securities in the company,
• rights in the company (including voting rights).

In such circumstances, the consideration given to the company is not new consideration, unless it represents:

• the returning to the company of money or value which was treated as a qualifying distribution when it emerged from the company, or
• the returning to the company of a repayment by the company of share capital or principal secured, or
• the lifting of obligations from the company on the cancellation or extinguishment of share capital or securities, or on the acquisition of those shares or securities by the company.

The legislation goes on to limit any new consideration comprising repayments returned or rights given up (or, alternatively, obligations lifted). It does this by reference to the new consideration originally given for the shares or securities in question. However, an exception is where the shares were a qualifying distribution when they were issued, as a result of ICTA88/S210. In such cases, the nominal value of the shares constitutes new consideration even though the shares were not issued for full consideration.

The effect of these provisions is thus the logical one of recognising as new consideration:

• anything derived from shares or securities in the company so far as it originated as new consideration received by the company,
• anything that comes out of the company which is taxed as a distribution and returned to it.

However, any value reflecting accumulated profits, which have not been subjected to a distribution charge, cannot be treated as new consideration.

Note that ICTA88/S254 (6) and (7) only restrict new consideration derived from share capital in or securities of the same company. It is possible for a company to recognise as new consideration the full value of shares in another company which are received in exchange for the issue of fresh capital or securities.