The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:
Companies Act 2006 allows a company to repurchase its own issued share capital, provided certain conditions are met. This type of transaction is sometimes referred to as a ‘share buyback’ or a ‘purchase of own shares’.
The repurchased shares can either be immediately cancelled, which is typically the case, or they may in some circumstances be retained by the company (effectively ‘in treasury’). If the shares are retained, companies can sell them for cash (to raise funds or under an option scheme) or transfer them for the purposes of employee share schemes. These shares, referred to as ‘treasury shares’, are dealt with in further detail in the Treasury shares following a share buy back guidance note.
The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’. Under the income treatment, the purchase is dealt with as an income distribution (ie dividend). However, there is an exception for buybacks made by unquoted trading companies where, provided certain conditions are met, the seller is instead treated as making a capital disposal. See the Income treatment for purchase of own shares and Capital treatment for purchase of own shares guidance notes for further details.
An advance clearance procedure is available to obtain certainty on HMRC’s view of the tax treatment of the buyback. This is explored further in the Purchase of own shares clearances and reporting guidance note.
This and subsequent guidance notes in this sub-topic focus primarily on the tax and legal aspects of a share buyback involving a private limited company. For shareholders in such companies, a purchase of own shares can offer a tax efficient exit route from the company. It may also offer a convenient way of buying out a shareholder without
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