Corporation Tax

Purchase of own shares ― overview

Produced by Tolley
  • 27 Jun 2022 10:00

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

  • Purchase of own shares ― overview
  • Why carry out a purchase of own shares?
  • Issues to consider before carrying out a share buyback
  • Legal considerations
  • Tax treatment on a purchase of own shares
  • Tax treatment for the shareholders
  • Tax treatment for the company making the buyback
  • Issues to consider after carrying out a share buyback
  • Links to articles ― purchase of own shares

Purchase of own shares ― overview

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 a 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

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