Introduction to this document

Purchase of own shares clearance letter

Where a shareholder of an unquoted company sells their shares back to the issuing company the proceeds in excess of the cost of the shares usually taxed as income. However, if conditions are met the transaction is treated as capital. An application can be made to HMRC for confirmation of the tax treatment.


It’s usually more tax efficient for a shareholder selling their shares by the issuing company for the transaction to be treated as capital rather than income. For capital treatment to apply, there are strict conditions set out in s.1033 of the Corporation Tax Act 2010 (CTA). The company must be an unquoted trading company and the purchase must meet either Condition A or Condition B:

Condition A (all must be met)

  • the repurchase is made wholly or mainly in order to benefit the trade carried on by the company (or a 75% subsidiary). For example, a long-standing director wishing to depart to allow new younger management to take the company forward would be to the benefit of the trade.
  • the repurchase does not form part of a scheme or arrangement which aims either to enable the participation in the profits of the company without receiving a dividend or for the avoidance of tax
  • the seller must be UK resident in the tax year of the purchase
  • the seller must have owned the shares for at least five years (three years if acquired as a result of a death, and the ownership period of the deceased is included). Holding periods of a spouse are aggregated for this purpose.
  • there must be a substantial reduction in the vendor’s shareholding - the fraction after the buy-back must not exceed 75% of the fraction beforehand
  • following the buy-back the seller must not be connected with the company.


Condition B

  • the whole, or substantially the whole, of the payment is to provide funds to pay a person’s IHT bill within he period of two years after the death.

transaction in securites

Whatever the tax treament the transaction must be notified to HMRC in accordance with s.748 CTA for confirmation that the share buy-back is not part of a scheme or arrangement to avoid tax. This can be included in the same letter asking for confirmation of capital treatment.  


Advance clearance

Use our Purchase of Own Shares Clearance Letter to apply to HMRC for advance clearance.