Posted on March 17, Comments Off on Purchase Of Own Shares: A disposal of shares will typically involve a sale or possibly a gift of the shares.

However, for ER purposes a disposal of an interest in shares can also include a disposal that is treated as made by virtue of legislation in TCGA , s Those provisions generally treat capital distributions from a company in respect of shares as consideration for the disposal of an interest in them.

Thus for example this potentially brings capital payments to an individual for a company purchase of own shares within the scope of ER. Generally speaking, when a company buys back its own shares from a shareholder, any payment in excess of the capital originally subscribed for the shares would ordinarily be treated as an income distribution CTA , s 1. However, there is an exception from income distribution treatment on a purchase of own shares in an unquoted trading company CTA , s If certain conditions are satisfied in ss , the transaction automatically falls outside income distribution treatment, and the shareholder is normally treated as receiving a capital payment instead unless the shareholder is a share dealer, in which case the receipt is treated as trading income.

Share Buybacks – Income Tax or Capital Gain? – HMT LLP

A company purchase of own shares must comply with company law requirements in CA to be valid. Unfortunately, in practice the company law aspects are often overlooked, particularly where family or owner-managed companies are concerned. Company law is outside the scope of this article. Either the terms of the contract must be authorised by a company resolution before the contract is entered into, or the contract must provide that no shares may be purchased pursuant to the contract unless its terms have been authorised by a company resolution CA , s 2 nb there are separate authority rules for off market purchases relating to employee share schemes, which are not considered here.

Therefore the contract for a company purchase of own shares is not completed until it is duly authorised under company law.

For CGT purposes, the general rule is that the date of disposal of an asset such as shares is when the contract is made, unless the contract is conditional, in which case the date of disposal is when the condition is satisfied TCGA , s In a recent tax tribunal case see below , the tribunal pointed out that if there is a contract for a company purchase of own shares which is subject to approval by special resolution, the contract has to be a conditional one, and the date of disposal under s 28 2 will therefore be the date on which the condition was satisfied.

The timing of disposals can have important implications for tax purposes. For example, a capital payment to an individual on a company purchase of own shares may be subject to an ER claim where certain conditions are met throughout the period of one year ending with the date of disposal.

Those conditions in TCGA , s I 6 are: With regard to the second of these conditions i. In Moore v Revenue v Customs [] UKFTT TC , the taxpayer was a director shareholder of a trading company, who was also employed with the company under a contract of employment.

Following a dispute between the taxpayer and the other director shareholders, it was agreed that the taxpayer would leave the business. Subsequently, at a general meeting of the company on 29 May , it was resolved that the company would purchase the 2, shares from the taxpayer, and that the company would take additional borrowing.

On the same day, the taxpayer signed a compromise agreement for the termination of his employment, and also Companies House papers concerning his resignation as a director. The taxpayer declared the share disposal on his tax return and claimed ER.

However, following an enquiry into the return, HMRC concluded that the taxpayer was not entitled to ER, because he was not an officer or employee of the company throughout the period of one year ending with the disposal of his shares. The taxpayer originally contended that the disposal of his shares took place on 29 May , and that this was also the date on which he resigned as a director. However, at the First-tier Tribunal hearing the taxpayer accepted that he had ceased employment with the company and was no longer an office holder from 28 February Instead, the taxpayer argued that the completion of the negotiations for the disposal of his shares resulted in a binding contract for sale in February , and it followed that this was the date of disposal for capital gains tax purposes.

The issue for the tribunal to decide was therefore whether there was an unconditional contract for the disposal of the shares by 28 February The tribunal said that the case turned on a simple matter of law.

Company law in CA , ss required that a contract for a company purchase of shares must be approved in advance by resolution. That resolution was not passed until 29 May The company was therefore incapable of entering into a valid contract to purchase the shares until the resolution had been passed.

Even if the contract terms had been agreed in February , so that there had been a contract at that time, the tribunal considered that it must have been a conditional contract.

The date of disposal under a conditional contract in accordance with TCGA , s 28 2 would be the date on which the condition was satisfied i. The taxpayer ceased to be a director or employee on 28 February The Moore case illustrates the importance of timing disposals carefully, in terms of ensuring that the conditions for ER are satisfied at that point.

Even though the taxpayer in this case ceased to be a director and employee of the company in February , it might have been possible to argue that he effectively continued to be an employee, based on ER case law. The tribunal accepted that the taxpayer had not been paid commission entitlements due to personal circumstances at the time, and because his financial needs were satisfied by dividend payments received from the company. The company had also continued to provide him with a phone and laptop, and met the costs of his home internet contract.

In Moore , the taxpayer also continued to provide services to the company after his employment had ceased.

Unfortunately, his services were provided through a personal service company, rather than being provided directly. Perhaps unsurprisingly, the taxpayer did not seek to argue that the services he provided through his personal service company amounted to a continuation of his former employment.

Entrepreneurs' Relief? | AccountingWEB

Home About Us Services Contact. Mark McLaughlin Associates Chartered Tax Advisers. Purchase Of Own Shares: Company purchase of own shares Generally speaking, when a company buys back its own shares from a shareholder, any payment in excess of the capital originally subscribed for the shares would ordinarily be treated as an income distribution CTA , s 1. Company law A company purchase of own shares must comply with company law requirements in CA to be valid. Date of disposal For CGT purposes, the general rule is that the date of disposal of an asset such as shares is when the contract is made, unless the contract is conditional, in which case the date of disposal is when the condition is satisfied TCGA , s FREE Newsletter sign up for Practice Update.