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Ensuring Capital Treatment On Purchase Of Own Shares

Can a company buy back its shares?



If a shareholder wishes to exit a business and can't find another shareholder or third party to purchase their shares, the company may be entitled to buy back the shares ...

It's worthwhile talking to HMRC beforehand to see what their position would be!

It's worthwhile talking to HMRC beforehand to see what their position would be!

copyright: whyframeshot / 123rf stock photo

The first thing to ensure is that the articles of association legally permit the company to buy back the shares. If they don't, a deal must either be done with another shareholder or a third party must be found to purchase the shares on offer.

If permitted, when a company buys back it's own shares, an income distribution is said to have occurred. This means that the (soon to be ex) shareholder will be charged Income Tax on the amount paid, minus the original purchase price of the shares, as though it were a dividend.

Under certain conditions, the shareholder may be able to treat the sale as a capital disposal subject to Capital Gains Tax. This is beneficial to the shareholder as Capital Gains Tax rates are lower than Income Tax rates. The shareholder, if they are a Director, officer or employee may qualify for the beneficial Entrepreneurs Relief and pay just 10% tax. A saving of up to 28.1%!

Capital treatment for tax if the following conditions satisfied:

  • The shareholder must have held the trading company's shares for five years

  • The departing shareholder's holding must substantially reduce

  • There must be a solid business case

  • The buyback cannot be a part of a tax avoidance plan

If not it will be treated as a dividend.

I would certainly recommend asking HMRC for advance assurance before undertaking the buyback transaction as knowing their position in advance would help you to account for it correctly.

I recently helped a company secure capital treatment where the 25% shareholder wanted to sell as he was moving abroad. The 75% shareholder didn't have the funds to acquire the shares himself, so did a company buyback securing capital treatment.

"Would you like to know more?"

If you'd like to find out more about your company buying back shares and ensuring capital treatment then do call me on 01908 774323 or click here to ping me an email and let's see how I can help you.

Until next time ...


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More about Helen Beaumont ...

Helen brings the personal tax planning experience of the top 20 tax companies to Essendon. Formerly of MacIntyre Hudson (with 45 offices nationwide), Helen worked at Chancery for more than 10 years before joining Essendon as the personal tax specialist.

Tax Planning can make a considerable difference to your tax liability. Helen has specialist knowledge and experience in tax planning and uses every opportunity to minimise your tax bill is utilised. By analysing your investments, income, profit and expenditures, Helen will provide strategic tax planning expertise that could offer significant savings, whilst delivering clear, honest advice and guidance.

When Helen is not at Essendon she spends time with her young son and likes going on long walks with the family dog.