Capital treatment for purchase of own shares

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

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

This document discusses these rules in detail, together with the conditions to be fulfilled; conditions A or B, and minimum period of ownership of shares; the substantial reduction test and the connection test for it to qualify for capital treatment.


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 Consultation on tax rules for company distributions (LNB News 14/12/2015 177) includes consideration of potential changes to these rules. This is because HMRC considers that in some instances taxpayers’ use of the rules gives an unfair result. The window for responses closes on 3 February 2016, with resulting changes expected to have effect from April 2016.

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. Please note that the concept of ordinary residence is to be abolished from April 2013.
  • 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

More on Purchase by a company of own shares: