Mark McLaughlin looks at company purchases of own shares and warns not to become too focused on the more difficult rules for capital treatment.
A company purchase of its own shares from a shareholder is a popular ‘exit’ strategy when an individual shareholder is retiring, or a dissenting shareholder is departing.
Income vs capital
When a company buys back its own shares from an individual shareholder, amounts above the capital originally subscribed generally constitute a distribution of income (i.e., like a dividend). However, if certain conditions are satisfied, the vendor is normally treated as receiving a capital payment instead. This can be tax-efficient if capital gains tax (CGT) business asset disposal relief (BADR) is available and the CGT rate is only 10%.
This ‘capital treatment’ is subject to various conditions (in CTA 2010,
