Nichola Ross Martin's Tax Consultancy

• A retiring director or shareholder may wish to dispose of his shareholding in a company.
• The remaining shareholders may not have the cash to buy his shares.
• The company may execute a purchase of its own shares: this cancels the shares and provides an exit route for the shareholder.

There are two ways that a company may execute a purchase of own shares:

A purchase of own shares out of capital

• A process whereby undistributable capital reserves are reduced without the need for a court order is possible following Companies Act 2006
• See Purchase (repurchase) of own shares – out of capital

A purchase of own shares out of distributable reserves

• A simpler procedure to the purchase of own shares out of capital, again made easier by Companies Act 2006, see Purchase (repurchase) of own shares

Purchase of own shares and tax

• When the qualifying conditions are met, the proceeds of a share buy-back are  treated as capital.
• It is easy to disqualify to ensure of income tax treatment: that might be favourable in the case of a basic rate taxpayer.
• Tax treatment is discussed further in the guides above.