176 Purchase of unquoted shares by issuing company or its subsidiary

Summary

Where an unquoted company (that is, an unquoted trading company or an unquoted holding company of a trading group) buys back its own shares (or its holding company’s shares) from a shareholder who is not a dealer in those shares, the payment made to the shareholder is, subject to certain conditions being satisfied, not to be treated as a distribution. As the payment is not to be treated as a distribution, capital gains tax treatment applies to the shareholder’s disposal of the shares.

Details

(1) Chapter 2 of this Part treats as a distribution so much of a payment made by an unquoted trading company or the unquoted holding company of a trading group in acquiring its own shares as exceeds the issue price of those shares. Where, however, the provisions of this section and the following sections of this Chapter are satisfied, such a buy back of shares is not to be treated as a distribution (other than for the purpose of the close company surcharge on investment and rental income provided for by sections 440 and 441). Where such a transaction is not treated as a distribution, it will be subject to capital gain tax treatment.

The conditions which must be satisfied if such a purchase is not to be treated as a distribution are —

• the acquisition of the shares by the company must be wholly or mainly for the benefit of the trade of the company or any of its 51 per cent subsidiaries,
• the buy back must not be part of a scheme or arrangement the purpose of which is to enable the shareholder to participate in the profits of the company or any of its 51 per cent subsidiaries without receiving a dividend.

In addition, the conditions set out in sections 177 to 181 must be satisfied in so far as they are applicable.

The various conditions necessary for a buy-back not to be treated as a distribution are waived where it can be shown that shares had to be disposed of back to the issuing company in order to discharge inheritance tax in respect of an inheritance by that shareholder of the company’s shares or to repay borrowings used to pay the inheritance tax. All or almost all of the payment made by the company acquiring the shares (apart from any capital gains tax paid by the shareholder on the disposal of the shares) must be applied in paying the inheritance tax or to repaying borrowings used to pay inheritance tax. For the dispensation to apply the shareholder must not otherwise have been able to discharge the tax due without undue hardship. Where the shareholder has borrowed, it must be the case that there would have been hardship unless the shareholder had both borrowed to pay the inheritance tax and disposed of the shares to the issuing company to repay the money borrowed.

(2) In order for this section to apply to a subsidiary company purchasing its holding company’s shares, it is necessary to determine whether the section would apply if the holding company were to be treated as acquiring its own shares instead of the subsidiary company. If the section would so apply, then it applies in the case of the subsidiary company acquiring its holding company’s shares.

Relevant Date: Finance Act 2021