Commentary

D6.615 Capital treatment—reduction in holding

Corporate tax
Corporate tax | Commentary

D6.615 Capital treatment—reduction in holding

Corporate tax | Commentary

D6.615 Capital treatment—reduction in holding

General

If the vendor retains shares in the company after the buy-back, his interest as a shareholder in the company must be substantially reduced1 (ie the shareholder's interest in the company (after the buy-back) must be less than seventy five per cent of his interest immediately before the purchase). Furthermore there must be no scheme or arrangement whereby, within one year of the buy-back, the vendor would have a greater interest. This applies irrespective of whether the arrangement etc was expressly designed to have this effect or merely likely to do so2.

When the company in question is a member of a group of companies (ie a company and its 51% subsidiaries) then, in certain circumstances, it is the vendor's interest in the group which must be substantially reduced. (For details of these rules see below).

Substantial reduction test

The substantial reduction in the vendor's interest as a shareholder in the company or group of companies is considered in two ways (both interests must be substantially reduced to satisfy the test overall):

  1.  

    (a)     in relation to his shareholding (see below); and

  2.  

    (b)     in relation to his entitlement to share in the profits of the company or the group (see below)

In each of these tests, the interests of persons associated with the vendor are also relevant. Associates include3:

  1.  

    (a)     spouses or civil partners4 living together are associated with each other

  2.  

    (b)     children aged under 18 and their parents are associated with each other

  3.  

    (c)     a person who is

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