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Two quoted companies have, to my knowledge, given free bonus issues of redeemable shares, and no doubt there have been others. In both cases the bonus shares have been redeemed for cash shortly after issue and the documentation from the company declares that the new shares are to be treated as any other bonus shares, whilst the redemption of them is a capital gains tax part disposal rather than an income tax distribution.
Two quoted companies have, to my knowledge, given free bonus issues of redeemable shares, and no doubt there have been others. In both cases the bonus shares have been redeemed for cash shortly after issue and the documentation from the company declares that the new shares are to be treated as any other bonus shares, whilst the redemption of them is a capital gains tax part disposal rather than an income tax distribution.
As nothing is paid for the shares, it seems to me that they must fall squarely within section 209(2)(c), Taxes Act 1988 and thus be liable to income tax upon receipt. This, however, is contrary to the advice given by the companies concerned, which leaves me in a quandary with self assessment. Can readers please provide the solution?
Assuming the advice from the companies to be correct, what is the treatment of the shares in a trust with a life tenant? If the proceeds of redemption are paid to the life tenant, does he or she have tax liability in respect of it?
(Query T15,856) – High Society.
'High Society' is correct in identifying that any bonus issue of redeemable shares will be caught by section 209(2)(c), Taxes Act 1988 and will be chargeable as an income distribution. The value of the distribution is determined by section 209(8) as the excess of the nominal value of the share capital issued over any new consideration given for the issue of the shares. Section 14(2), Taxes Act 1988 deems such a distribution to be a 'non-qualifying distribution'. This meant, before the abolition of advance corporation tax, that no advance corporation tax was payable on the distribution but continues to have relevance now because it means that there will also be a tax charge when the shares are redeemed. The repayment of a bonus issue of shares which were not a qualifying distribution when issued will attract a charge to tax as a distribution within section 209(2)(b). However, the extent of the tax charge is limited by section 233(2), Taxes Act 1988 so the tax charge is reduced by both the notional tax credit and the tax already paid on the non-qualifying distribution.
So what should one put on the self-assessment return? Self assessment puts the responsibility for creating the correct tax charge in the hands of the taxpayer. This means that, notwithstanding that the company issuing the bonus shares indicated that they should be treated in a certain way for tax purposes, the obligation is on the taxpayer to ensure that the advice given is correct, so that the tax return, and the resultant self-assessment, is correct. The tax charge under both section 209(2)(c) and section 209(2)(b) as applicable will need to be included on the return covering the relevant period. To omit this, or to include the redemption of the shares within the capital gains tax pages, would be negligent and could lead to penalties being charged on any additional culpable tax. Of course, this does leave a significant question mark over the advice given by the companies involved and it would seem logical to recommend any taxpayer involved in this should be seeking to clarify from the companies themselves the information contained within the documentation.
The final point regarding the treatment of shares in a trust with a life interest will now be clear. The bonus issue and redemption will be chargeable as income on the beneficiary. – Ros Martin, Professional Tax Practice.
The companies' advice must be based on the premise that bonus shares issued in relation to an existing holding are treated to capital gains tax as if they were part of the original acquisition on which they are a bonus. Although themselves issued for no consideration, they have a cost value, because the cost of the original acquisition is simply redistributed over the enlarged holding. Barring any contradictory statutory provision, the fact of the bonus shares being redeemable would make no difference.
There is contradictory legislation, in the form of section 209(2)(c), Taxes Act 1988, which labels as a distribution the value of any redeemable shares issued otherwise than for 'new consideration'. It makes no exception for shares issued as a bonus to pre-existing holdings, and the linked paragraphs of section 249 apply it to individuals, personal representatives of deceased estates and trusts alike. One would be interested to hear from the companies involved on what statutory provisions their advice is based. – Man of Kent.
Editorial Note: I believe the answer is that companies allocate funds on share premium account to the bonus shares so that they are outside sections 209(2)(c) and 211. However it would no doubt be helpful if such companies gave more detailed analysis to their shareholders.
