Also known as a share buyback.
Purchase of own shares in a nutshell
The Companies Act 2006 provides a mechanism which allows a company to repurchase its own issued share capital. A share buyback is often a convenient way of buying out a dissenting or retiring shareholder, particularly where there is no suitable external purchaser. For the shareholder, the basic principle is that any amount paid in excess of the capital originally subscribed for the shares is taxed as a distribution (ie a dividend). However, for buybacks made by unquoted trading companies and provided certain conditions are met, capital gains tax treatment can be obtained for the shareholder.
The overview gives brief details of the tax treatment that can apply on a company purchase of own shares.
When will a share buyback be treated as an income distribution for the shareholder?
The income treatment applies by default on a share buyback. This is the normal treatment that applies to the purchase of own shares unless the relevant conditions for the capital treatment are satisfied.
How is the income distribution on a share buyback calculated?
The income distribution is equal to the amount received by the shareholder on the buyback less the original subscription price. The subscription price is typically the nominal value of the shares but can also include any new consideration received by the company for the shares. The distribution is taxed on the shareholder like a normal dividend and at their marginal rate of tax.
A capital gains calculation must also be carried out and is typically equal to the original subscription price less the amount that was actually paid by the shareholder for the shares. Therefore, if the shareholder was the original subscriber of the shares, the computation will result in a capital gain of nil. If the shareholder was not the original subscriber, a capital loss will arise.
When will the capital treatment apply for the shareholder on a share buyback?
A special treatment is afforded where the share buyback is made by an unquoted trading company or an unquoted holding company of a trading group, provided certain conditions are also met. In such cases, the amount received by a shareholder on selling his shares back to the company may be treated as capital, rather than as an income distribution.
Capital treatment will apply where the repurchase is made for the benefit of the trade of the company and it meets the following conditions:
- the repurchase is not be made for the avoidance of tax
- the seller is UK resident and has owned the shares for at least five years
- there is a substantial reduction in the seller’s shareholding (must be 75% or less of what it was before the buyback)
- the seller must not own more than 30% of the shares following the buyback
Alternatively, capital treatment can also apply where the proceeds, or almost all the proceeds, are used to discharge an inheritance tax liability but only where the liability could not otherwise have been paid without causing undue hardship.
How is the gain or loss calculated under the capital treatment?
The capital gain or loss is simply equal to the proceeds received on the buyback less the amount actually paid for the shares.
What clearance is available with HMRC on a share buyback?
An advance statutory clearance procedure is available which, if obtained, provides assurance that HMRC is satisfied that the proposed buyback falls within the special capital treatment.
Does a claim need to be made by the shareholder before capital treatment can apply?
Where the conditions are met, the capital treatment is automatic, so no claim is required by the shareholder. However, there are additional obligations on the company which must report details to HMRC within 60 days of the share buyback.
What is the tax treatment for the company making the share buyback?
Irrespective of the treatment for the shareholder, the transaction costs (eg tax or legal advice) for the company of carrying out the purchase of own shares will be treated as capital in nature and a revenue trading deduction denied.
However, it may be possible for the company to obtain a deduction under the loan relationship rules for any financing costs from money used to finance the share buyback.
The purchase of the shares is subject to stamp duty at 0.5% of the price paid by the company (unless the consideration is £1,000 or less).