174 Taxation of dealer’s receipts on purchase of shares by issuing company or by its subsidiary

Summary

This section addresses the special case where a company purchases its own shares or its holding company’s shares from a dealer in shares. The purchase price is taken into account as a trading receipt in calculating the dealer’s liability to tax. The dealer is charged to tax on the actual gain on the transaction. If the purchase is of fixed-rate preference shares, in certain instances, the company is treated as making and the dealer as receiving a distribution.

Details

Definitions

(1) “fixed-rate preference shares” are shares issued in return for a full subscription of new funds to the issuing company. Such shares must not carry any rights of conversion into other shares or securities or to additional shares or securities or to any dividends other than such dividends which are of a fixed amount or at a fixed rate per cent on the nominal value of the shares.

“new consideration” is defined by reference to section 135 (distributions: supplemental).

Purchase of shares from a dealer in shares

(2) Where a company —

• purchases its own shares, or
• a subsidiary company purchases its holding company’s shares,

from a dealer in shares, the payment is taken into account in computing the trading profits of the dealer chargeable to tax under Case I or II of Schedule D. This ensures that a dealer who makes such a sale is charged on the sale as a normal trading profit.

Share dealers

(3) A person is treated as a dealer in shares if he/she is chargeable on his/her profit from a sale of shares as part of his/her trading or professional income.

Redemption, etc of shares

(4) The reference to the purchase of shares is extended to include the redemption and repayment of shares and the purchase of rights to acquire shares. The reference to the purchase price includes a reference to any sum payable on redemption or repayment.

Exceptions

(5) There is an exception to the treatment of the proceeds of share sales by dealers in shares (such as banks) as trading income in the hands of the dealers. Where the receipt arises on the redemption of fixed-rate preference shares which have been held from issue by the dealer, the normal distribution treatment applies. The effect of this is that where corporate dealers such as banks provide venture capital they will not be taxed on any premium they receive on the redemption. Thus, equity funding by corporate dealers is unaffected by this section.

Relevant Date: Finance Act 2021