Consideration from capital reduction was income

The taxpayers were shareholders in a GHL – a close company. It acquired subsidiaries by way of share-for-share exchanges. GHL then undertook two capital reductions – in 2010 and 2015 – resulting in the taxpayers receiving £10 a share as consideration for the cancellation of their GHL shares. They included these sums as capital subject to capital gains tax on their tax returns.

HMRC said the transactions in securities (TIS) legislation applied to the 2015 capital reduction and issued assessments against which the taxpayers appealed. They said ITA 2007 s 685(6) applied exempting the reduction from s 685(2)(a).

The First-tier Tribunal held that s 685(6) applied only where returns of share capital were lawfully distributable by way of dividend. This was not the case for GHL because UK law did not permit this. Therefore s 685(6) was not in play and the TIS rules...