Share buybacks—calculating the distribution and repayment of capital elements
Share buybacks—calculating the distribution and repayment of capital elements

The following Tax practice note provides comprehensive and up to date legal information covering:

  • Share buybacks—calculating the distribution and repayment of capital elements
  • Identifying the distribution element
  • Impact of company law requirements
  • The repayment of capital element
  • The impact of bonus issues
  • Bonus issue followed by share buyback
  • Share buyback followed by bonus issue

From a shareholder’s perspective, when a company buys back its own shares, either directly or through an intermediary acting as agent for the company (whether on- or off-market), the purchase normally involves two elements for tax purposes:

  1. a disposal of shares by the shareholder for chargeable gains purposes (with the disposal proceeds being the amount of cash received less any amount chargeable to income or corporation tax), and

  2. an income distribution by the company to the shareholder to the extent the proceeds exceed the amount originally subscribed for the shares

Accordingly, in order to be able to calculate precisely how a shareholder will be taxed on a share buyback, it is necessary to determine how much of the amount paid is treated as a distribution. Note that this calculation is complicated where there have been prior bonus issues of shares by the company (for which, see below).

The taxation of share buybacks more generally is discussed in Practice Note: Tax consequences of share buybacks.

This Practice Note focuses specifically on identifying the income and capital elements of the repurchase amount.

For the special rules which provide wholly capital treatment for certain unquoted trading company buybacks, see Practice Note: Unquoted trading company share buybacks—capital treatment rules.

Identifying the distribution element

As discussed in more detail in Practice Note: Scope of distributions for tax purposes, the tax rules recognise eight different categories

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