Exempt purchase of own shares by a company

Typically, when a company makes payments to its shareholders related to their shares, these are considered qualifying distributions and may be subject to Income Tax.

However, under certain conditions, such payments can be classified as exempt distributions. An exempt distribution is not treated as a distribution but rather as payment for the disposal of shares, and it is subject to Capital Gains Tax (CGT).

When a company buys back its own shares, any amount paid above the original capital invested in those shares is generally treated as a distribution. Nevertheless, there are specific rules that allow an unquoted trading company or an unquoted holding company of a trading group to repurchase its own shares without triggering a distribution.

To facilitate this, the company can submit a clearance application to obtain advance confirmation from HMRC that the payment will be classified as an exempt distribution.

There are two situations where a payment on the purchase by a company of its own shares is not treated as a distribution:

• The company must be an unquoted trading company.
• The repurchase must meet one of these conditions: either Condition A (benefiting the company's trade) or Condition B (related to Inheritance Tax liability).

If you need tax advice in relation to buying or selling shares, give our expert team a call on 01380 723690 or email us.