Your firm has been asked to provide advice to Granada Ltd, and one of its shareholders, Maria. Maria wants advice on the tax consequences of selling some of her shares back to Granada Ltd.

Shares in Granada Ltd:
– Maria subscribed for 10,000 £1 ordinary shares in Granada Ltd at par in June 2006.
– Maria is one of four equal shareholders and directors of Granada Ltd.
– Maria intends to sell either 2,700 or 3,200 shares back to the company on 31 March 2016 at their current market value of £12·80 per share.
– All of the conditions for capital treatment are satisfied, except for, potentially, the condition relating to the reduction in the level of shareholding.

Required:
(a) (i) Explain, with the aid of calculations, why the capital treatment WILL NOT apply if Maria sells 2,700 of her shares back to Granada Ltd, but WILL apply if, alternatively, she sells back 3,200 shares. (4 marks)