Share Buy-Back

Company Purchase of Own Shares: Legal, Tax and Planning Guide

The company purchase of own shares is a strategic move for UK businesses seeking to manage ownership, exit retiring shareholders, or improve financial metrics. However, the process must align with legal, tax, and financial rules.

This guide explains every step of a company buying back its own shares, from the legal framework to HMRC clearance and accounting implications.

Legal Framework for Company Purchase of Own Shares

Under Part 18 of the Companies Act 2006, a company purchase of own shares must meet several legal conditions.

Start by reviewing the articles of association. They must allow the buy-back. If not, amend them before continuing.

Next, the company needs a buy-back agreement, approved by an ordinary resolution of shareholders. Any shareholder selling their shares cannot vote on the resolution.

Only fully paid shares are eligible. Payment must happen in full at the time of completion. Instalments apply only under certain employee share schemes.

Permitted Funding Methods

The company can fund the buy-back from:

• Distributable profits

• New share issue proceeds

• Capital, with extra procedures for private companies

Private companies can also use the de minimis exemption, allowing a buy-back funded by capital up to £15,000 or 5% of the share capital per year—whichever is lower.

Non-compliance voids the transaction, and directors may be personally liable.

🔗 Learn more about directors’ responsibilities in buy-backs

Tax Implications of Company Share Buy-Backs

The tax outcome of a company purchase of own shares depends on how HMRC treats the payment.

Income Distribution – The Default Tax Rule

By default, any amount paid above the nominal value is treated as a distribution, taxed at dividend rates. These rates can be higher than Capital Gains Tax (CGT). Also, the company receives no tax deduction.

Achieving Capital Gains Treatment

Under CTA 2010 s1033, the transaction can qualify for capital treatment if:

• The company is unquoted and trading

• The buy-back benefits the trade

• The shareholder held the shares for at least 5 years (or 3 in exit cases)

If capital treatment applies, the seller may benefit from Business Asset Disposal Relief (BADR) and pay just 10% CGT.

🔗 Explore BADR eligibility criteria

HMRC Clearance

Always apply for HMRC non-statutory clearance before completing the transaction. This confirms if capital treatment applies. The clearance remains valid for 30 days.

Stamp Duty Reserve Tax (SDRT)

Usually, 0.5% SDRT applies when filing Form SH03 with Companies House. However, exemptions may apply, such as transfers to Qualifying Asset Holding Companies (QAHCs).

Accounting Treatment of Company-Owned Shares

The accounting entries for a company purchase of own shares reduce the company’s equity.

FRS 102 Treatment

Under FRS 102:

• The nominal value is deducted from the share capital account

• An equal amount is added to the Capital Redemption Reserve

• Premiums reduce retained earnings (if funded by profit)

IFRS Approach

Under IFRS, shares bought back are recorded as a deduction from equity at cost. These do not pass through profit and loss.

Disclosure Obligations

Every company must:

• Disclose the purpose of the buy-back

• Show changes in share capital and reserves

• Report treasury shares or cancelled shares—even under FRS 102 Section 1A

🔗 Need help with FRS 102 disclosures

Distributable Profits and Share Buy-Backs

Distributable profits are a key factor in any company purchase of own shares.

The company must have enough profits at the completion date, not just at contract signing. If profits are insufficient, the transaction becomes unlawful.

Using profits reduces the company’s ability to pay future dividends. Also, the Capital Redemption Reserve created is non-distributable.

Directors should review updated management accounts and consider issuing a solvency statement.

Statutory Filing Obligations for Share Buy-Backs

Companies must file these documents:

• SH03: Filed within 28 days. If SDRT applies, send to HMRC first.

• SH06: Filed after shares are cancelled or held in treasury.

• Register of Members: Must reflect the changes.

• Confirmation Statement (CS01) and annual accounts: Update to show new share capital and reserves

These filings ensure the buy-back stays legal.

Business Planning Benefits of Share Buy-Backs

A company purchase of own shares is useful for:

• Shareholder exit (e.g. retirement)

• Succession planning

• Rebalancing ownership among directors

Fewer shares can raise Earnings per Share (EPS) and increase the ownership percentage for remaining shareholders.

Risks to Manage

• Cash flow pressure

• Potential breach of loan covenants

• Reduced dividend flexibility

• Need for updated accounts and HMRC clearance

• Fair valuation to avoid disputes or HMRC scrutiny

If the company lacks sufficient profit, consider alternatives like a dividend followed by subscription or a capital reduction demerger.

Ethical Adviser Conduct in Share Buy-Backs

Advisers play a key role in guiding clients through a company purchase of own shares. Ethical integrity is crucial.

Avoid Conflicts of Interest

If acting for both company and shareholder, use separate advisers or engagement letters. This maintains independence and avoids bias.

No Aggressive Tax Structuring

Don’t recommend buy-backs solely to convert income into capital. HMRC may reject capital treatment if no trade benefit exists.

Stay fact-based when drafting the HMRC clearance case. Avoid acting as an advocate. Document all reasoning carefully.

Transparency in Disclosures

Disclose the buy-back clearly in financial statements and filings. Do not use structures that hide the transaction’s economic substance.

Keep up with changes in:

• FRS 102

• HMRC Manuals

• Case law

Decline assignments outside your expertise.

Conclusion

The company purchase of own shares is a strategic tool for many UK businesses. It helps manage exits, control, and succession—when used properly.

To succeed, you must comply with:

• Legal requirements

• Tax planning rules

• Accounting disclosures

• Statutory filings

Seek HMRC clearance, check distributable profits, and document the business purpose. With careful planning, this tool can deliver both commercial and tax benefits.

📞 Written by etaxfiling.co.uk
Contact us for expert support on share buy-backs, legal procedures, HMRC clearance, and corporate tax planning.