177 Conditions as to residence and period of ownership

Summary

This section provides that for a buy back of shares by a company not to be treated as a distribution the shareholder or “vendor” must satisfy certain conditions as to residence and period of ownership.

Details

Residence criteria

(1) & (2) The vendor (that is, the owner of the shares – see section 173(2) – immediately before the purchase is made) must be resident and (except for a company) ordinarily resident for the chargeable period (that is, the accounting period for a company, otherwise the year of assessment) in which the shares are purchased (that is, the redemption, repayment or purchase referred to in section 176(1)(a)). This ensures that the vendor is within the charge to capital gains tax. If the shares are held through a nominee, the nominee must also be resident and ordinarily resident in the State. Part 34 provides the rules for determining the “residence” and “ordinary residence” of individuals for the purpose of the Tax Acts and the Capital Gains Tax Acts.

Trustees’ residence

(3) The residence and ordinary residence of trustees is determined under capital gains tax rules. These rules provide that trustees are treated as a single and continuing body of persons resident and ordinarily resident in the State unless the general administration of the trust is carried on outside the State and the trustees or a majority of them are not resident or not ordinarily resident in the State.

A professional trustee is treated as not being resident in the State if the settlement funds were provided by a person who was not at the time of the settlement domiciled, resident or ordinarily resident in the State. If the majority of trustees of a professionally managed trust are, or are to be treated as, non-resident, the general administration of the trust is treated as ordinarily carried on outside the State.

Personal representatives’ residence

(4) The residence and ordinary residence status of personal representatives is taken as that of the deceased immediately before his/her death.

Company’s residence

(5) If the vendor is a company only the company’s “residence” is relevant. A company is not required to be “ordinarily resident” in the State.

Period of ownership of shares

(6) The vendor must have owned the shares throughout a 5 year period ending with the date of the buy-back. However, where the shares have been appropriated to a participant by an Approved Profit Sharing Scheme (APSS) the 5 year period is reduced to 3 years.

(7) Where shares are transferred to the vendor by his/her spouse or civil partner at a time when they were living together, ownership by that spouse or civil partner counts as ownership by the vendor, unless the spouse or civil partner is still alive and is no longer the vendor’s spouse or civil partner living with the vendor at the time of the buy back.

(8) Where the vendor is the personal representative of a deceased person, then, for the purpose of determining the period of ownership of the shares by the vendor, the period of ownership by the deceased is treated as ownership by the personal representative. Similarly, if the vendor inherited the shares under a will or intestacy, the ownership by the deceased or his/her personal representative is treated as ownership by the vendor. In both these cases the period of minimum ownership (subsection (6)) is reduced from 5 to 3 years.

Shares of the same class

(9) When shares of the same class are acquired at different times, there are rules for matching disposals with acquisitions to determine whether the period of ownership criteria has been satisfied. A disposal by a vendor involving the buy back by a company of its own shares is matched with the vendor’s earliest acquisition and other previous disposals are matched with the vendor’s latest acquisitions.

Bonus issues, etc

(10) Shares acquired by way of bonus issue or by way of exchange on a company reorganisation, reconstruction or amalgamation are treated as having been acquired at the same time as the original holding was acquired. However, rights issues are treated as acquired when they are actually issued and not when the original holding was acquired.

Relevant Date: Finance Act 2021