CTM36840 - Particular topics: transactions in securities: Circumstance D: extraction of company funds: cash or equivalent

See ITA07/S689 for income tax advantages on or after 6 April 2007 or ICTA88/704D for income tax advantages prior to 6 April 2007 and corporation tax advantages all periods.

Circumstance D is present where in connection with the distribution of profits of a company a person receives consideration without paying or bearing tax on it as income:

• which is, or represents the value of, assets available for distribution by way of dividend (or apart from anything done by the company would have been), or
• in respect of future receipts of the company, or
• that represents the value of its trading stock.

Circumstance D does not apply to a company quoted on the Stock Exchange (or a company controlled by such a company) unless under the control of five or fewer persons. If the consideration is in shares or securities, see CTM36845.

Example 1

Miss D holds the entire issued share capital of two trading companies, Company X and Company Y. Company Y has distributable reserves of £200,000. Miss D decides to sell her shares in Company X to Company Y at their market value of £100,000 paid in cash. The £100,000 will not be charged to income tax on receipt by Miss D.

Miss D has received consideration of £100,000 in connection with the distribution of profits of company Y which is assets of Company Y available for distribution as dividends and she will not pay or bear tax on it as income. The tax advantage counteracted is the amount of income tax chargeable if £100,000 had been received as a distribution from the company. Credit is given by concession for any CGT paid on return of the sum as chargeable gains.

Example 2

Mr F holds the share capital of trading company X Ltd which has distributable reserves of £500,000. Mr F does not want to receive the sum as a dividend because he does not want to pay income tax. He would prefer to receive the reserves as capital and claim relief for his capital losses in earlier years, 75% taper relief and the annual exemption which will together reduce the tax payable to nil.

Mr F sets up an Employee Benefit Trust or Employee Share Option Trust or similar vehicle. X Ltd makes a contribution of £500,000 to the trustees and Mr F sells some of his shares to them for £500,000.

Mr F will receive £500,000 from the trustees free of liability to IT. The share purchase has been financed indirectly by X Ltd and is assets of the company which are, or apart from anything done by the company would have been, available for distribution as dividends.

The tax advantage counteracted is the amount of income tax chargeable if £500,000 had been received as a distribution from the company. Credit is given by concession if any CGT is paid on return of the sum as chargeable gains.