CH 25 - Purchase of Own Shares

Question 1

How purchase of own shares can be treated?

Answer 1

can be treated as:
- an income distribution, unless the conditions for
- capital treatment are met, or a shareholder is a company

Question 2

Desrcibe how purchase of own shares is treated under ‘INCOME distribution’.

Answer 2

INCOME TREATMENT
* the receipt by the individual is** treated as a dividend** (tax free £1,000)
* The dividend will be the amount received on the share buy-back less the original subscription price of the shares.

CGT also applies;
Sale proceeds = original subscription price of the shares
(will result in NIL, if individual was original subscriber or will be loss if wasn’t)

Question 3

Desrcibe how purchase of own shares is treated under ‘CAPITAL distribution’.

Answer 3

Under the capital treatment;
- the disposal gives rise to a capital gain (BADAR may qualify)

Sales proceeds = actual price paid per share
Cost = origianl subscription price paid

condition applies for capital treatment to apply

Question 4

When capital treatment for purchase of own shares **ONLY applies? **

Answer 4

The capital treatment only applies where:

• • the repurchase is by unquoted trading companies which are not 51% subsidiaries of a quoted company, or by unquoted holding companies of a trading group; (CTA 2010, s.1033)
• • the repurchase is wholly or mainly for the benefit of the trade;
• • the shares are bought back from a UK resident vendor who has held the shares for at least five years (three years if acquired on a death);
• • the vendor, as a result of the buy-back, reduces their interest in the company by at least 25%; and
• • the vendor is not connected with the company following the buy-back (below 30% of voting power, distribution etc).

OR

The capital treatment will also apply if the money paid is used wholly or mainly to discharge an inheritance tax liability arising as a result of a death and without the share repurchase the payment of this liability would have caused undue hardship.

Question 5

What is definition of TRADING COMPANY for;
- capital treatment of Purch. of own shares &
- BADAR

Answer 5

Trading Company for capital treatment is:
- a company whose business consists wholly or mainly (ie greater than 50%) of carrying on a trade or trades

Trading Company for BADAR is:
- a company whose non-trading activities are not substantial which is taken to be ‘more than 20%’.

(BADAR requires higher treshold of trading activities 80%.)

Question 6

Who is considered to be associate for connection tests which are required for capital teratement to apply?

Answer 6

spouse or civil partners who live together and children aged under 18.

The holdings of any associates are taken into account for both the substantial reduction and the connection tests which are required for the capital treatment to apply.

Question 7

How Treasury shares are treated for tax purposes?

Answer 7

For tax purposes, the shares are treated as if they were cancelled.

In reality are shares repurchased by the company but not cancelled.