Capital treatment for purchase of own shares

Produced by Tolley

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

  • Capital treatment for purchase of own shares
  • Capital treatment on a share buyback ― for the benefit of the trade
  • Capital treatment on a share buyback ― period of ownership
  • Capital treatment on a share buyback ― substantial reduction test
  • Nominal value of the shares
  • Entitlement to profits
  • Associates
  • Groups
  • The connection test
  • Purchase of own shares ― problems with funding the purchase
  • More...

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 the gain or loss is computed under the capital treatment, 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. For these purposes, the definition of unquoted company includes companies listed on the Alternative Investment Market or those dealt in on the Unlisted Securities Market.

A ‘trading company’ is a company whose business consists wholly or mainly (ie greater than 50%) of carrying on a trade or trades, and a ‘trading group’ is a group the business of whose members, taken together, consists wholly or mainly of carrying on a trade or trades. The trading status is tested at the date that the share buyback takes place. For the meaning of what constitutes a trade, see the Badges of trade guidance note. However, the dealing in shares, securities, land or futures is specifically excluded from being a trade for these purposes.

It should be noted that the definition of trading company differs for the purposes of business asset disposal relief (formerly known as entrepreneurs’ relief) which requires a higher threshold of trading activities (80%). Therefore, it is possible that a company may satisfy the ‘wholly or mainly’ test for the purposes of a share buyback but fail to meet the conditions for business asset disposal relief.

To qualify for capital treatment on a purchase of own shares, the repurchase must fulfil either Condition A or Condition B:

Condition A (all must be fulfilled)

  1. the repurchase is made wholly or mainly in order to benefit the trade carried on by the company, or a 75% subsidiary (see below)

  2. the repurchase does

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