CTM15400 - Distributions: general: repayment of share capital - bonus issues
The general rule in ICTA88/S209 (2)(b) is that a repayment of share capital is not a distribution.
This would be open to abuse in the absence of any other provisions. A company could issue bonus shares and then repay them without any distribution arising.
To prevent this the general rule is modified by ICTA88/S211 (1). This provides that if:
- the share capital concerned was not issued in return for new consideration, and
- the issue of the share capital concerned was not a qualifying distribution,
then distributions the company later makes in respect of such share capital are not repayments of share capital. These distributions are ‘other distributions out of the assets of the company’, and thus within ICTA88/S209 (2)(b). But, these distributions will not be within ICTA88/S209 (2)(b) to the extent they (and previous relevant distributions) exceed the share capital not issued for new consideration and not treated as qualifying distributions.
The effect of ICTA88/S211 (1) is that no amount is treated as a repayment of share capital until the amount of such repayment exceeds the total amount of any earlier bonus issues.
ICTA88/S211 (1) does not operate to the extent that the bonus issue fell to be treated at the time of issue as a qualifying distribution, for example under ICTA88/S210.
Its operation is also limited by ICTA88/S211 (2) (see CTM15410).
If the bonus issue was a stock dividend within ICTA88/S249 (4), (5) or (6) then ICTA88/S230 limits the operation of ICTA88/S211 (1) (see CTM17000 onwards).
Where there is a partial repayment, ICTA88/S211 (1) treats the bonus element as repaid in priority to amounts paid up for new consideration.
Same share capital, ICTA88/S211 (4)
For the purposes of ICTA88/S211 (1), all shares of the same class are treated as representing the same share capital. Shares are also treated as the same share capital as other shares if they are:
- issued in respect of those other shares, or
- directly or indirectly converted into, or exchanged for, those other shares.
For example, a company may make a bonus issue of ordinary shares to preference shareholders. A repayment of the preference shares could, for the purposes of ICTA88/S211 (1), be treated as a repayment of the bonus issue.
ICTA88/S211 (1) and (3) makes appropriate provision for successive repayments of the capital after a bonus issue.
A repayment of share capital is normally in cash, but need not be. A company may make a repayment by transferring assets. Any excess of the market value of the assets transferred over the nominal value of the shares repaid, including any appropriate premium, will be a distribution by virtue of ICTA88/S209 (4) (see CTM15250).
However a purchase by a company of its own shares must be for cash.
Share premium, ICTA88/S211 (5), (6), & (7)
- a company issues share capital at a premium representing new consideration, and
- the company subsequently makes a repayment of share capital,
the premium is treated as forming part of that share capital for the purposes of deciding the extent of any repayment of share capital.
However the premium is not treated in this way to the extent it has been used in paying up share capital under ICTA88/S254 (5) (see CTM15130).
Subject to ICTA88/S211 (5), a premium paid on redemption of share capital is not treated as a repayment of capital.
Special rules apply where an unquoted trading company purchases its own shares, or redeems or repays share capital. This is the ‘purchase of own share’ legislation at ICTA88/S219 (see CTM17570).