Where a shareholder of an unquoted company sells their shares back to the issuing company the proceeds in excess of the cost of the shares usually taxed as income. However, if conditions are met the transaction is treated as capital. An application can be made to HMRC for confirmation of the tax treatment.
Conditions
It’s usually more tax efficient for a shareholder selling their shares by the issuing company for the transaction to be treated as capital rather than income. For capital treatment to apply, there are strict conditions set out in s.1033 of the Corporation Tax Act 2010 (CTA). The company must be an unquoted trading company and the purchase must meet either Condition A or Condition B:
Condition A (all must be met)
or
Condition B
transaction in securites
Whatever the tax treament the transaction must be notified to HMRC in accordance with s.748 CTA for confirmation that the share buy-back is not part of a scheme or arrangement to avoid tax. This can be included in the same letter asking for confirmation of capital treatment.
Advance clearance
Use our Purchase of Own Shares Clearance Letter to apply to HMRC for advance clearance.