The company law requirements are fairly detailed, but the main ones are as follows: There is a specific chapter in that legislation dealing with a purchase of own shares (Pt 18, Ch 4). The law dealing with the acquisition by limited company of its own shares is in Companies Act 2006, Pt 18. If the company fails to comply with those requirements, the transaction is treated as void, and an offence is committed which could result in a fine for the company, and possibly imprisonment for its officers (CA 2006, s 658(2), (3)). Regardless of whether the purchase of own shares would otherwise be treated as an income or a capital distribution, the transaction has to satisfy certain company law requirements for it to be a valid purchase of own shares. ![]() This treatment will generally be beneficial if the shareholder is entitled to entrepreneurs’ relief at 10% on the shares, where the individual would otherwise be liable to the dividend higher rate of 32.5%, or the dividend additional rate of 37.5% if the purchase of own shares was treated as an income distribution. The capital payment will normally be subject to CGT if a capital gain arises. ![]() If those special rules apply, the shareholder whose shares are bought back is treated as receiving a capital payment for the shares, as opposed to an income distribution. However, there are special rules which can apply to a purchase of own shares by an unquoted trading company, where certain conditions are satisfied (CTA 2010, Pt 23, Ch 3). The amount of the distribution is normally the sale proceeds for the shares, less the amount of capital originally subscribed for them (CTA 2010, s 1000(1) ). The default tax position where an unquoted trading company buys back its shares from an individual shareholder is broadly that the shareholder who sells his or her shares is treated as receiving a distribution for income tax purposes, similar to a dividend.
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