»Ê¹ÚÌåÓýapp

ITTOIA05/S396B/404A (7)

»Ê¹ÚÌåÓýappre are two exclusions in S396B/404A (7) that apply even where all of the conditions of S396B/404A are met.

Distribution of amounts representing base cost

»Ê¹ÚÌåÓýapp first exclusion is for any amount up to which, if S396B/404A did not apply, there would be no gain accruing for Capital Gains Tax. This is to ensure that amounts that represent a return to the investor of their “base costâ€� are not taxed as a distribution.

Example

Mr A is an IT contractor who provides his services through a company. Mr A’s only investment in the company was £1,000, which he used to subscribe for 1,000 £1 ordinary shares. He winds up the company and continues to provide an identical service as a sole trader. All of the conditions A to D of S396B/404A are met.

»Ê¹ÚÌåÓýapp amount of the distribution in the winding up is £100,000. Of this, £1,000 represents Mr A’s base cost and so is excluded from being treated as a distribution â€� in the terms of the legislation it “does not exceed the amount that would result in no capital gain accruingâ€�. »Ê¹ÚÌåÓýapp remaining £99,000 will be treated as a distribution.

Distribution of irredeemable shares

Sometimes when a company is wound-up the shareholder receives shares as a distribution in the liquidation. Although it is arguable that there is a tax advantage here, this is not the type of transaction that S396B/404A is aimed at. To the extent that the distribution comprises irredeemable shares S396B/404A will not apply.

Example

Company A has one wholly-owned subsidiary, Company B which supplies car parts and accessories. Company A acquired Company B some years earlier when the members had plans for extending the business but these did not come to fruition. »Ê¹ÚÌåÓýapp shareholders wish to avoid the continuing expense of maintaining two companies and decide to liquidate Company A. »Ê¹ÚÌåÓýapp liquidator transfers the shares in Company B to the members as distributions in liquidation. Company B continues trading.

»Ê¹ÚÌåÓýapp effect of CTA10/S1030 is that the distribution from the liquidation is not an income distribution. S396B/404A will not apply either, to the extent the shareholders received irredeemable shares as consideration. If, however the shareholders had received as consideration shares in Company B and cash of £100,000 then the exclusion from S396B/404A would not apply to the cash element. Condition C (CTM36230) will be met because Company B’s activities continue as before.

»Ê¹ÚÌåÓýappre may be a chargeable gain in the hands of Company A’s shareholders on the capital distribution of Company B shares.

Reconstruction involving transfer of assets

Condition D is unlikely to be satisfied where there is a restructuring of the commercial architecture that involves transfers of assets followed by issues of shares, as in the following example.

Company C has two trades: an electrical supplies store and a hair salon. »Ê¹ÚÌåÓýapp shareholders take the view that these trades would be better served by being carried on in separate companies with no group ties. This takes place through the “demergerâ€� described below.

Company C reorganises and divides its share capital so that ‘Pâ€� shareholders are entitled to the assets of the electrical supplies business and ‘Qâ€� shareholders are entitled to the assets of the hair salon business. Company C is wound-up and the electrical supplies business and assets are transferred by the liquidator to new company D, which issues shares to holders of ‘Pâ€� shares in Company C. »Ê¹ÚÌåÓýapp liquidator transfers the salon business and assets to new company E, which issues shares to holders of ‘Qâ€� shares in Company C.

»Ê¹ÚÌåÓýapp end result is that Company C no longer exists, and the original shareholders of Company C now hold shares directly in Company D and in Company E.

»Ê¹ÚÌåÓýapp effect of CTA10/S1030 is that the distribution from the liquidation is not an income distribution. TCGA92/S136 will also apply to the reconstruction, which means that there is similarly no chargeable gain in the hands of Company C’s shareholders: their new shares in Company D or Company E are treated as being the same asset as their shares in Company C.

S396B/404A will not apply either, as Condition D will not be met in these circumstances.