Purchase of own shares: Where’s the benefit?

Mark McLaughlin looks at a key requirement for capital gains treatment on a company purchase of own shares from a shareholder. A company purchase of own shares (CPOS) can be a useful ‘exit’ strategy for shareholders of owner-managed or family companies in the right circumstances. However, a valid CPOS must comply with company law requirements (which are not considered here).

Income or capital gain?

When an unquoted trading company (or unquoted holding company of a trading group) buys back its own shares from the shareholder, any ‘premium’ (i.e., payment exceeding the capital originally subscribed for the shares) constitutes an income distribution (i.e., akin to a dividend), which is liable to income tax at rates of 10.75%, 35.75% or 39.95% (for 2026/27), depending on the vendor’s level of income.

However, if certain conditions are met, the vendor is treated as receiving a capital payment instead. This sometimes provides individual shareholders with a tax-efficient exit route from the company, particularly if capital gains tax (CGT) business asset disposal relief is available so the CGT rate is only 18% as opposed to 24% (for 2026/27).

The main condition for capital gains treatment on a CPOS (in CTA 2010, Pt 23, Ch 3) broadly includes an anti-avoidance provision, and requirements about the vendor shareholder’s residence, length of ownership of the shares and the extent (if any) to which the individual can remain connected with the company.

Importantly, the CPOS must also be made wholly or mainly for the purpose of benefiting the company’s trade (or the trade of any 75% subsidiary). Whether this ‘trade benefit test’ is satisfied sometimes causes disputes between vendor shareholders and HM Revenue and Customs (HMRC).

For the greater good

For example, in Boulting v Revenue and Customs [2025] UKFTT 1272 (TC), the taxpayer (JB) owned shares in a company (PSC) and was the managing director of PSC until he retired. Following various transactions with family members, JB had reduced his shareholding in PSC and held 50 ‘B’ shares. Subsequently, it was proposed that JB would give 38 shares to his son (MB) and sell eight shares to PSC; he would retain four shares (which were later transferred to his grandchildren). It was considered that the purchase was necessary for the long-term sustainability of the company.

There had been disagreements at board level for several years before JB retired. PSC purchased JB’s eight shares for £4.8m through a CPOS. Following an enquiry into JB’s tax return for 2013/14, which treated the sale of his shares to PSC as subject to CGT, HMRC concluded that the sale was subject to income tax. HMRC considered that the purchase was not necessary to benefit PSC’s trade; the business was already profitable and growing, and there was no clear evidence that the purchase was essential to unlock investment or resolve deadlock.

HMRC also submitted that because (as it contended) the price paid was excessive, it could not be regarded as a payment whose whole or main purpose was to benefit PSC’s trade; the purchase was a mechanism to remunerate JB for his historic investment and risk in the business, not to benefit the ongoing trade.

However, the First-tier Tribunal allowed JB’s appeal, concluding that JB’s retirement as a director and relinquishing control was intended to benefit the relevant business by enabling investments to be made and resolving related management-level disputes and tensions.

Practical tip

Be aware of HMRC’s stated application of the ‘trade benefit test’ in its Statement of Practice 2/82 (tinyurl.com/HMRC-SP2-82), albeit it is guidance, not law