D6.605 Buy-back of share capital—general
A UK resident company may purchase its own shares subject to certain conditions imposed by the Companies Act (most notably that the consideration must be cash), see below. This is commonly referred to as a company purchase of own shares or a share buy-back. The decision to effect a share buy-back rather than pay a dividend is usually driven by commercial considerations. The most significant consideration is often a desire to increase gearing by reducing the level of equity compared to debt.
Simple share buy-backs, repayments and redemptions of share capital (hereinafter referred to as buy-backs) do not constitute a reorganisation, but are mentioned in this division for completeness1.
As to the cancellation of any shares in or securities of one member of a group of companies under the Companies Act, see TCGA 1992, s 176(3) and D2.350, D2.350.
HMRC also provides a Helpsheet which provides a useful guide to straightforward situations to help understand where a company makes a purchase of its own shares, the conditions that must be met before the payment can be treated as an exempt distribution and the HMRC clearance procedure2.
Share buy-backs can be taxed either as a:
(a) distribution to the extent that they exceed the amount originally subscribed for the shares3 (although the purchase by the company is still treated as a disposal by the shareholder concerned), see D6.606–D6.607; or
(b) capital receipt in the hands of the shareholder (for unquoted companies only and