High level considerations and tax implications and risks associated with a Company Purchase of Own Shares (CPOOS)

The default treatment for a CPOOS, assuming that no more than market value is paid for them, is broadly that the sum paid would be treated as an income distribution subject to income tax on the individual at their marginal dividend rate of income tax (currently 8.75%/33.75%/39.35% for basic/higher/additional rate taxpayers respectively – but increasing from 6 April 2026) in the tax year of receipt.

For a valid CPOOS to be executed, complete and correct implementation is key.

If all relevant conditions are satisfied for capital treatment to apply to a CPOOS, the individual as the recipient of the payment would instead be subject to Capital Gains Tax (“CGT”) at their marginal rate (currently 24% for higher rate taxpayers or 14% for any gains to which BADR applies – increasing to 18% from 6 April 2026) on any chargeable gain computed by reference the payment they receive.

The criteria for capital treatment to apply include amongst others that;

• The individual must have held the shares being purchased for 5 years,
• The individuals interest together with any ‘associates’ they have must be ‘substantially reduced’,
• The individual must not, immediately after the purchase, be ‘connected’ with the purchasing company or any member of its group, and
• The purchase must take place for the benefit of the trade of the purchasing company/its group.

If capital treatment is to be available, then amongst other criteria, HMRC must accept that the purchase is made wholly or mainly for the purpose of benefiting a trade carried on by the purchasing company or any of its 75% subsidiaries and does not form part of a scheme or arrangement the main purpose or one of the main purposes of which is;

• To enable the owner of the shares to participate in the profits of the company without receiving a dividend, or
• The avoidance of tax.

HMRC may resist granting clearance in relation to the trade benefit requirement where the individual selling their shares is not a controlling shareholder, or it cannot be demonstrated how their sale will otherwise benefit the trade.

Advance clearance may be sought from HMRC as to whether or not they are satisfied that capital treatment should apply to a purchase in the given circumstances. HMRC have 30 days to respond to grant clearance, deny clearance, or request any further information they require to reach a conclusion on the position.

Seeking advance clearance is strongly recommended to give certainty on the tax implications of the proposed purchase before proceeding (and as details of the transaction and circumstances must be compiled and sent to HMRC in any event).

With any clearance granted by HMRC only being as valid as the information presented to them in the clearance application, if HMRC are to be bound by any clearance they grant it will be vital that;

• The company proceeds exactly as set out in the clearance application, and
• If there are any changes in facts between granting of clearance and completion, that HMRC are approached for confirmation that any clearance they have granted is unaffected.

Given the above, with a view to receiving clearance at the earliest opportunity any application submitted to HMRC should contain all relevant details and should only be submitted at such time as proposed transactions are no longer subject to any changes/negotiations.

If the purchase is to be treated as ‘capital’, HMRC must also be notified of the reasons why within 60 days of the transaction taking place (this is a much more straightforward process if advance clearance has been sought and granted).

The purchasing company would have to pay Stamp Duty at 0.5% of the purchase price within 30 days of the completion of the purchase.

There are strict company law requirements which must be satisfied in a CPOS is to be valid, amongst which are that the payment must be made upon the purchase (sufficient funds are therefore required) and if a relatively simpler (and cheaper) company law process is to be followed the company must have sufficient distributable reserves to cover the proposed payment.

It is therefore important that the company has sufficient banking facilities in place to execute the full payment on the date the shares are repurchased, as it is not possible to leave amounts owing to the vendor of the shares.