Unquoted trading company share buybacks—capital treatment rules
Unquoted trading company share buybacks—capital treatment rules

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

  • Unquoted trading company share buybacks—capital treatment rules
  • Conditions for capital treatment
  • Unquoted trading companies and holding companies
  • Wholly or mainly for the benefit of a trade
  • No avoidance
  • Five year holding period
  • Substantial reduction—individual company test
  • Substantial reduction—group test
  • No post-buyback connection and no disqualifying interests
  • Relaxation of the requirements in certain cases
  • more

On a share buyback that is implemented by the company directly or through an intermediary acting as agent for the company, the standard tax treatment for a UK resident shareholder is that the repurchase amount it is made up of:

  1. a repayment of capital up to the amount originally subscribed for shares (as reduced by any prior bonus issues), and

  2. an income distribution equal to any excess over that amount

For more on the standard rules that apply, see Practice Notes:

  1. Tax consequences of share buybacks

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

However, there are special rules for unquoted companies. Where they apply, they prevent any part of the repurchase proceeds on a buyback being treated as a distribution, with the result that the entirety of the amount received by the shareholder is treated as the proceeds of a disposal for capital gains or corporation tax on chargeable gains purposes.

Conditions for capital treatment

The capital treatment rules apply to a buyback (or to a repayment or redemption) of company shares if:

  1. the company is:

    1. unquoted, and

    2. either

      1. a trading company, or

      2. the holding company of a trading group, and

  2. the repurchase (redemption or repayment) is made wholly or mainly for the benefit of a trade and meets the following conditions:

    1. the buyback is not part of an

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