Share Buybacks - New Opportunities for Corporate Investors, Including Life Companies

The recent High Court decision in Strand Futures and Options Ltd v Vojak overturns Revenue practice (SP4/89) and offers significant tax benefits to corporation tax paying investors on share buybacks. It is possible that the Revenue will appeal the decision or seek to reverse its effect by attempting to introduce new law.

Key points

The High Court has held that, on a share buyback, the distribution element of the buyback price does not form part of the consideration for the disposal of the shares by a corporate investor and so is not included in the computation of chargeable gains.

This has the effect of reducing the chargeable gain suffered by a corporate investor on a buyback, or increasing or even creating a capital loss.

Strand Futures does not affect corporates which are not subject to tax on chargeable gains, such as investment trusts and authorised unit trusts.

Strand Futures - the facts

In 1986 Strand Futures and Options Limited ("SFOL"), a UK resident company, subscribed for 29.9% of the issued share capital of another UK resident company, City of London Options Limited ("CLO"). In 1995 CLO bought back half of SFOL's shareholding for £871,630. At the same time, SFOL sold the other half of its shareholding in CLO to a third party, also for £871,630.

SFOL did not include the payment received from CLO on the own share purchase in its computation of corporation tax on chargeable gains for the year ended 31 December 1995. The Revenue considered that the payment should have been included in the chargeable gains computation and issued a notice of assessment with net capital gains of £1.6 million. SFOL appealed unsuccessfully to the Special Commissioners but has now succeeded before the High Court.

Corporation Tax calculation: SP 4/89

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Amount originally subscribed for shares

£1000

Acquisition cost of shares

£1500

Buyback purchase price

£5000

Distribution element

£4000

Capital element

£1000

CT on chargeable gains:

£5000 - £1500) £3500 @ 30% = £1050

Corporation Tax calculation: post Strand Futures

†

No CT on distribution element of £4000

†

CT on chargeable gains:

(£1000 - £1500) = no gain and possibly loss of £500, subject to rules on depreciatory transactions

Share buybacks - tax treatment

Most aspects of the taxation of investors on a share buyback are not controversial. It was agreed by both parties in Strand Futures that:

Individuals are subject to income tax under Schedule F on all dividends and other distributions of UK resident companies (section 20 Taxes Act 1988)

"Distribution" includes any sum received on a redemption, repayment or purchase of a company's own shares excluding any amount which represents a repayment of capital on shares (section 209(2)(b) Taxes Act 1988). This is referred to as "the distribution element".

In the case of the purchase by CLO of its own shares from SFOL, the purchase price of £871,630 less so much of that sum as represented a repayment of capital on the shares was a...