April 9, 2024



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’.

For shareholders who are UK resident individuals, the income treatment will apply by default to the repurchase. However, where the buyback is carried out by an unquoted trading company and specific conditions are met, the capital treatment applies (discussed in Part 4).

For shareholders who are not UK resident individuals, only the income treatment can apply as one of the conditions that must be satisfied under the capital treatment is for the shareholder to be UK resident.

For a corporate shareholder, it is likely that the distribution will fall within one of the dividend exemptions, and as a result the capital treatment applies to most corporate shareholders. Therefore, the substantial shareholding exemption (SSE) can apply on the buyback.

Under the income treatment, the payment is treated as an income distribution (ie dividends).

To the extent that proceeds on the purchase exceed the amount of capital originally subscribed for the shares, an income tax charge will arise and be charged to tax at the shareholder’s marginal dividend tax rate.

CTA 2010, ss 1000(1)(B), 1024

Broadly, the value of the distribution subject to income tax will be equal to the proceeds arising on the purchase of own shares less the original subscription cost of the shares. The subscription price is normally the same as the nominal value of the shares. Any new consideration received by the company for the shares would also reduce the amount chargeable as a distribution.

CTA 2010, s 1115; CTM15140

In addition to being treated as an income distribution, as the shareholder is also disposing of a capital asset (ie their shares), a capital gains computation must also be prepared. Technically, the amount chargeable to capital gains is the cash received for the sale of the shares less the amount that has been charged to income tax under the distribution rules.

TCGA 1992, s 37

In practice, this usually means that the proceeds in the capital gains calculation is equal to the original subscription price of the shares.

Consequently, if the shareholder was the original subscriber of the shares, this computation will result in a capital gain of nil. If the individual was not the original subscriber, a capital loss will arise.

To summarise, the two-stage calculation under the income treatment is as follows:

£   £Amount received on share buyback:X Original subscription price: XLess: original subscription price(X) Less: actual cost (X)Dividend receivedX Chargeable gain / loss Nil/(X)

There may be issues related to the ‘original subscription price’ where for example shares have been issues at a premium (see CTM17520), there have been bonus share issues (see CTM17530) or shares have been acquired as part of a share for share exchange (see CTM17510). Care must be taken.

Following the above, the ‘capital treatment’ will prove to be more beneficial for shareholders due to the favourable CGT rates (10% / 20%) and the availability of the annual exempt amount (£12,300 2021/22) compared to the dividend nil rate band (£2,000).

We shall look at that next time

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