CTM36845 - Particular topics: transactions in securities: Circumstance E: extraction of company funds: as share capital or securities

See ITA07/S690 for income tax advantages on or after 6 April 2007 or ICTA88/704E for income tax advantages prior to 6 April 2007 and corporation tax advantages all periods.

Circumstance E is present when a shareholder receives non-taxable consideration, which might otherwise be received in the form of a dividend or other distribution, and the consideration takes the form of shares or securities. (Where the consideration is received in the form of cash, see CTM36840.) Circumstance E 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 takes the form of non-redeemable shares counteraction is deferred until the share capital is repaid.

The consideration must represent the value of assets that are (or apart from anything done by the company would have been) available for distribution by way of dividend or trading stock of the company. Circumstance E is unlikely to be present unless one of the companies concerned has (or recently had) distributable reserves. In the case of non-redeemable shares it is sufficient for there to be reserves at the time the share capital is repaid.

Example

A holds all the issued 100 £1 shares in company X (reserves £80,000) and the 100 £1 shares of company Y (reserves £80,000). A exchanges the 100 £1 shares in X for 80,000 £1 redeemable preference shares and 10,000 £1 Ord shares issued by Y. Circumstance E is present and the tax advantage counteracted is the income tax payable if A had received a dividend of £80,000 from company Y. If any of the 10,000 £1 ordinary shares in company Y are subsequently repaid, the tax advantage obtained by not paying income tax on the amount repaid may also be cancelled in the year of repayment.