Revenue Note for Guidance

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Revenue Note for Guidance

131 Bonus issue following repayment of share capital

Summary

Where a company repays share capital and at or after the repayment there is, for no new consideration, a bonus issue of shares, the amount of the bonus issue, up to the amount of the share capital repaid, is treated as a distribution. In the case of a company which is not a close company, a bonus issue of share capital which is not redeemable and which is made more than 10 years after the capital repayment is not to be treated as a distribution.

Details

Definitions

(1) The terms “ordinary shares” and “preference shares” are self-explanatory.

“new consideration not derived from ordinary shares” is new consideration other than consideration consisting of —

  • the surrender, transfer or cancellation of ordinary shares whether of the company issuing the shares or of any other company,
  • the variation of rights in ordinary shares of the company or of any other company, or
  • consideration derived from a repayment of share capital paid in respect of ordinary shares of the company or of any other company.

Bonus issue following repayment of share capital treated as distribution

(2) Where a company repays share capital (other than certain preference shares) and at or after the time of that repayment issues as paid up share capital for which full consideration is not made (that is, a bonus issue), then, the amount so paid up (that is, the amount of the bonus issue) is treated as a distribution made in respect of the shares on which the amount is paid up. The amount or value of the distribution is the nominal amount of the share capital issued (that is, the bonus issue) less —

  • the amount in cash or the market value of any new consideration received (up to the amount of the repayment), and
  • any amounts already treated as distributions (in respect of the same repayment) under this provision.

Example

A company makes a repayment of share capital of €100,000. Subsequently it makes an issue of 50,000 fully paid €1 ordinary shares at €0.40 a share and later it makes a bonus issue of 200,000 fully paid €1 preference shares for no consideration.

The first issue is treated as a distribution of the amount of €30,000 (50,000 × €0.60). The second issue is treated as a distribution of €70,000 (€100,000 less €30,000).

Exceptions

(3) The above provision does not apply in the case of the repayment of share capital relating to certain preference shares. The preference shares must be either —

  • fully paid preference shares in issue on 27 November, 1975, which continue to be fully paid preference shares from that date until their repayment, or
  • preference shares issued after 27 November, 1975, as fully paid up preference shares wholly for new consideration (provided the new consideration was not derived from ordinary shares – see above) and continued to be fully paid up preference shares from their issue until repayment.

This exclusion enables a company with preference share capital to redeem it and issue unsecured loan stock in its place, thereby eliminating the distributions represented by preference dividends and replacing them with loan stock interest which is an allowable deduction for corporation tax purposes.

(4) A further exclusion from this section applies where a company (other than a close company) makes a bonus issue, following the repayment of share capital, and the bonus issue is not redeemable share capital and takes place more than 10 years after the repayment of the share capital which preceded the bonus issue.

Relevant Date: Finance Act 2021