Introduction to this document

Purchase of own shares clearance letter

For unquoted trading companies, the amount received by a shareholder on selling their shares back to the company may be treated as capital rather than as a distribution provided certain conditions are met. To prevent any nasty surprises later on, you can apply for advance clearance to determine the correct treatment.


A company share buy-back is a useful way for director shareholders to exit a company. It’s usually better for the departing shareholder if the sale qualifies as a capital disposal - particularly if they can take advantage of the 10% entrepreneurs’ relief tax rate. But for capital treatment to apply, there are strict conditions set out in s.1033 of the Corporation Tax Act 2010. The company must be an unquoted trading company and the repurchase 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 the period of two years after the death.

Advance clearance

To avoid uncertainty as to whether the capital treatment will apply to your company’s share repurchase, you can apply to HMRC for advance clearance. Use our Purchase of Own Shares Clearance Letter to do this.