Revenue Note for Guidance

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Revenue Note for Guidance

181 Relaxation of conditions in certain cases

Where the requirements —

  • that there be a substantial reduction in the combined shareholding and profit entitlement of the vendor and the vendor’s associates, and
  • that the vendor should not be connected with the purchasing company,

are not satisfied in respect of a vendor, the vendor may nevertheless qualify for capital gains tax treatment in respect of the sale of so much of the shares as is necessary for a second vendor, being an associate of the first vendor, to satisfy the first requirement set out above. The first vendor must satisfy the residence and minimum period of ownership tests (see section 177).

Example

H Ltd has an issued share capital of 10,000 ordinary shares of which J owns 500 and the trustees of a settlement (for which J provided the assets) owns 2,500. It is proposed that H Ltd buy back the 500 shares owned by J.

After the buy back, the trustees, who are associated with J, will continue to hold shares in H Ltd; their shareholding must be included in calculating the reduction in J’s shareholding interest, which will be —

500 + 2,500

Before the sale

= 30 per cent

10,000

2,500

After the sale

= 26.31 per cent

9,500

Assuming that J complies with all the other requirements to qualify for capital gains tax treatment, J still fails to show a reduction of 25 per cent in J’s shareholding interest. For J to satisfy the test of reduced shareholding, it is necessary to reduce the shareholding of the trustees to 22.5 per cent (that is, 75 per cent of 30 per cent). The trustees can therefore offer to sell 468 shares to H Ltd reducing their shareholding to —

2,500–468

2,032

=

= 22.5 per cent

9,500 – 468

9,032

Although the sale by the trustees does not itself satisfy the substantial reduction of shareholding tests, it qualifies for capital gains treatment as does the sale by J. If the trustees sold 500 shares to H Ltd, the proceeds of the excess 32 shares would be treated as a distribution.

Relevant Date: Finance Act 2021