S122TCGA92
A capital distribution is any distribution from a company, in money ormoney’s worth, which is not treated as income for income tax purposes. Therefore,a capital distribution can include a distribution of a company’s assets as wellas a cash payment, see the example below.Most distributions, for example, dividend payments, will be incomedistributions. S385 ITTOIA05 deals with the meaning of distribution for income taxpurposes, see also CTM15120+.A distribution which is not an income distribution will be a capitaldistribution. The capital distributions you are most likely to see in practiceare:
- distributions made by a liquidator in the course of a winding-up.Separate instructions on liquidations are atCG40400onwards.
- cash payments made when one company takes over another and issues itsown shares or debentures as part of the consideration for the shares it isacquiring. Separate instructions on share exchanges are atCG52521onwards.
- distributions made on a repayment or reduction of a company’s sharecapital.
The sale of provisional letters of allotment in a rights issue is alsotreated as a capital distribution.
The receipt of a capital distribution is treated as a disposal of aninterest in the underlying shares. When a person receives a capital distribution, the date of disposal is the date of the receipt or entitlement to the distribution.The normal computational rules apply unless the distributionis small compared with the value of the shareholding. For advice on smallcapital distributions seeCG57835+.
Demergers
A company can effect a demerger by distributing the shares in a 75 percent subsidiary to its shareholders. If the conditions in s1076 CTA10 aresatisfied this will not be treated as a distribution for income tax purposes. Unders192 TCGA92 such a distribution is not treated as a capital distribution either.Instead, it is treated as a share reorganisation within ss126-130 TCGA92. For guidance on demergers seeCTM17250+.
Share reorganisation
S122 TCGA92 does not apply to the issue of any shares or debentures aspart of a share reorganisation. Therefore, a bonus issue or a rights issue at adiscount to the market value of the existing shares is not treated as a capitaldistribution. A share reorganisation may however involve the receipt of cash as wellas the issue of new shares or debentures. The cash payment may be offered toall shareholders as part of the terms of the reorganisation, for example, aspart of the consideration on a takeover. Or it may arise where, for example,the reorganisation provides for an issue of one new share for every 10 sharesheld, and any fractional entitlements to new shares are sold in the market onbehalf of the shareholders entitled to them and the cash proceeds paid over. Such cash payments fall within s128(3) TCGA92 seeCG51875+. But that does not prevent them fromqualifying for the small part disposals treatment in s122(2) TCGA92, seeCG57835+, provided that the cash amount issufficiently small.
For advice on share reorganisations generally, seeCG51700+.
Computations
Under s122(1) TCGA92, the receipt of a capital distribution is treated as a disposal of an interest in the underlying shares. The disposal proceeds are the amount or value of the capital distribution received. The normal computational rules for part-disposals apply. As no shares are actually sold, you cannot apportion the allowable cost by reference to the number of shares sold, see CG51575. You must use the usual part-disposal formula in s42 TCGA92,A / ( A + B) where:
A = the amount or value of the capital distribution.
B = the market value of the shareholding.
Example
- In March 2018 Mr Daley buys 10,000 £1 ordinary shares in Discount Motors Ltd for £18,000. Discount Motors Ltd has a small holding of shares in Ace Cars Ltd.
- In September 2023 Discount Motors Ltd reduces its £1 ordinary shares to 5p shares. It distributes 75p in cash and one 50p share in Ace Cars Ltd for every £1 ordinary share held. Discount Motors Ltd then restores its 5p shares to £1 by capitalising 95p per share out of reserves.
The market value of the Ace Cars Ltd shares at the time of the capital reduction is 20p.
The market value of the Discount Motors Ltd £1 ordinary shares after the capital reorganisation is 110p.
You compute the value of the capital distributions as follows:
| Cash10,000 x 75p | £7,500 |
| Plus Shares10,000 x 20p | £2,000 |
| Equals Total | £9,500 |
The value of the shareholding retained is 10,000 x 110p = £11,000.
You compute the gain as follows:
| Disposal proceeds | £9,500 |
| Less Cost£18,000 x (£9,500/(£9,500 + £11,000)) | £8,342 |
| Equals Gain | £1,158 |
Mr Daley is deemed to have acquired the Ace Cars Ltd shares at a cost of £2,000 (10,000 x 20p).
The restoration of the Discount Motors Ltd 5p shares to £1 shares is treated as an income distribution, see CTM15420. The net amount of the distribution is added to the allowable cost of the shareholding, see CG51825.
The section 104 holding is as follows:
| - | Number of shares | Pool of qualifying expenditure |
| March 2018 acquisition | 10,000 | £18,000 |
| Less September 2023 capital distribution | - | £8,342 |
| - | 10,000 | £9,658 |
| Plus Income distribution10,000 x 95p | - | £9,500 |
| - | 10,000 | £19,158 |
If you have any queries about how the capital distribution was valued, please refer to Shares and Assets Valuation (SAV).
