Capital treatment

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Capital treatment
  • Period of ownership
  • The substantial reduction test
  • The connection test
  • Advance clearance procedure and reporting

For unquoted trading companies only, the amount received by a shareholder on selling his shares back to the company may be treated as capital, rather than as a distribution, provided certain conditions are met. For an illustration of how this is computed see Example 1.

This treatment only applies to purchases of own shares by unquoted trading companies that are not 51% subsidiaries of a quoted company, or to purchases of own shares by unquoted holding companies of a trading group.

The repurchase must fulfil either Condition A or Condition B:

Condition A (all must be fulfilled)

  • the repurchase is made wholly or mainly in order to benefit the trade carried on by the company (or a 75% subsidiary)
  • the repurchase does not form part of a scheme or arrangement which aims either to enable the participation in the profits of the company without receiving a dividend or for the avoidance of tax
  • the vendor (or his nominee where applicable) must be resident and ordinarily resident in the UK in the tax year of the purchase. For this purpose, personal representatives are taken to have the same residence and ordinary residence as the deceased
  • the vendor must have owned the shares for at least five years (three years if acquired as a result of a death and the ownership period of the deceased is included). Holding periods of a spouse are aggregated for this purpose (see below for additional guidance).
  • there must be a substantial reduction in the vendor’s shareholding (see below)
  • following the buy back the vendor must not be connected with the company (see below)

See the Checklist - purchase of own shares (capital treatment - condition 'A').

Condition B

    More on Purchase by a company of own shares: