• Home
  • Blog

Company Purchase of own shares – the Benefits and Tax issues

A company purchase of own shares involves the company buying back its own shares from shareholders. In this post we cover the key considerations and the tax implications  

Company Purchase of own shares


The purchase of a company's own shares from a shareholder will either be treated as a capital transaction or income distribution. 

To ensure the capital treatment, a company purchase of own shares must meet a set of stringent conditions. You can obtain  clearance from HMRC to ensure the capital treatment automatically applies. Obtaining the capital treatment can be advantageous where an exiting shareholder is looking to claim Business Asset Disposal Relief on their share disposal,

Conditions for capital treatment

The key conditions to ensure the capital treatment of a company purchase of own shares are set out below:

The residency requirement

The vendor shareholder must be resident in the UK in the tax year the share re-purchase takes place.

The ownership requirement

The shareholder must have held their shares for the five years before the purchase of own shares. If the shares were acquired from a civil partner or spouse, the transferor spouse's period of ownership can be included. 

The civil partners or spouses must be living together at the date of transfer. They 
must also still be living together at the date of the purchase of own shares. However, there is an exception to this rule where the civil partner or spouse has passed away in the interim.

The five year ownership requirement is reduced to three years if the shares were acquired as a result of death. Additionally the shares will be treated as being held from the date that the deceased acquired the shares.

The trading requirement

The company must be a trading company or the holding company of 75% subsidiaries in a trading group. Although the test is different to that used for Business Asset Disposal Relief.

Equally importantly, companies dealing in shares, securities, land or futures will not qualify for the capital treatment. Additionally, whether assets are recognised in the balance sheet as stock or investment assets will  determine HMRC's approval to the capital treatment.

Substantial reduction requirement

The seller must significantly reduce their interest in the company after the sale. Their new interest, including that of their associates, must be no more than 75% of their previous interest.

Associates include the seller's spouse or civil partner, minor children. The precise definition can be found here.

A substantial reduction in share capital must also apply to entitlement to profits. What's more, particular care is required if different share classes with varying rights are involved. You cannot simply compare the number of shares before and after the purchase. This is because it may not reflect the correct entitlement to profits.

Connection test

The seller must not be connected with the company or any group company immediately after the purchase. The definition of 'connected' can be found here.

A seller is connected if they retain, directly or indirectly, or can acquire, more than 30% of the company’s, issued ordinary share capital, voting rights, loan capital plus issued share capital and assets on a winding-up.

Associates' rights (as defined in the substantial reduction test above) are included in this 30% test.

For example, if the seller owns 50 shares of a 100-share company (50%), they must reduce their holding significantly. They need to sell enough shares to own no more than 75% of their initial 50% (substantial reduction test) and no more than 30% of the company overall (connection test).

They would need to sell 30 shares, leaving them with 20 out of 70 shares, which is 28.5%. This meets both conditions.

The purchase must not be part of a scheme designed to give the seller or their associates disqualifying interests in the company.

Purpose test

The company must demonstrate that the sole or main purpose for the share repurchase is to benefit its trade (or that of its 75% subsidiary). 

This isn't the same as there being a commercial purpose behind the payment. Whilst retiring from a business and selling shares might be a commercial purpose for a shareholder this doesn't necessarily benefit the company.

So the trade benefit test is failed where the transaction is designed to serve the personal or wider commercial interests of the shareholder.

Advance clearance and notifying HMRC.

If all of the conditions are met, then capital treatment is mandatory and will apply automatically. HMRC will give advance clearance in respect of a proposed repurchase confirming that it will not be treated as an income distribution.

If capital treatment is being claimed, the company must notify HMRC with details of the transaction within 60 days after a repurchase of its own shares.

Alternatively, a person connected with the company must notify HMRC of details of any scheme or arrangement relating to disqualifying interests within 60 days of discovery.

If the capital treatment is being claimed it is easiest to report the transaction by sending HMRC a copy of the clearance and its acceptance with confirmation that the transaction went ahead as indicated.

Companies Act

The Companies Act 2006 requires immediate payment by the company on a purchase of own shares. The company must have sufficient distributable reserves to repurchase shares, unless it qualifies as de minimis or is made out of capital.

De minimis means the lower of £15,000 or less than 5% of the company's paid-up share capital at the start of the accounting period

The company needs to pass a special resolution to purchase its own shares.

What's more, a company cannot formally agree on a POS until the resolution is passed.
If the shareholder is a director, they need to resign to meet HMRC's trade benefit test. Complete and file Form TM01 with Companies House.

The company and selling shareholder must draw up a purchase agreement. A valuation is not normally required for HMRC, though dome form of amechanism to agree on a purchase price is necessary.

Both parties complete a stock transfer form as they sign the agreement. After the repurchase, the company cancels its shares and files forms SH03 and SH06 with Companies House within 28 days. It must also account to HMRC for stamp duty using SH03 at 0.5% (on transactions over £1,000) within 30 days.

For more useful information, check out our Ebooks here.

And if you'd like to know how we can help you with all of this, or with anything else, feel free to give us a call on 01202 048696 or email us at [email protected].

Alternatively, please feel free to complete our Business Questionnaire here.

Spread the word!

Why Friendly

We work with businesses and contractors/freelancers who want to embrace the world of online software and the benefits this brings. Using technology to help our clients is at the core of everything we do.

So if you'd like to find out more, just give a call or drop us an email - no hard sell.

Just friendly, professional advice!

Who we are

We're a small team with over 50 years experience of working with small businesses.

So we're in a unique position to understand the challenges that you face every day in your business.

And what's more, we're fully professionally qualified so you can be sure that your affairs are in safe hands.

Copyright 2016 by TFA Accountants Limited