View the related Tax Guidance about Purchase of own shares
Purchase of own shares ― overview
Purchase of own shares ― overviewThis guidance note discusses the purchase by a company of its own shares (often referred to as a ‘share buyback’ or a ‘purchase of own shares’). This may be considered for a variety of reasons, such as a tax efficient exit route from the company or a simple restructure of share capital. However, there are a number of issues, both legal and tax, that need to be considered before such a transaction is carried out.The repurchased shares can either be immediately cancelled, which is typically the case, or they may in some circumstances be retained by the company (effectively ‘in treasury’). If the shares are retained, companies can sell them for cash (to raise funds or under an option scheme) or transfer them for the purposes of employee share schemes. These shares, referred to as ‘treasury shares’, are dealt with in further detail in the Treasury shares following a share buy back guidance note.The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’. Under the income treatment, the purchase is dealt with as an income distribution (ie a dividend). However, there is an exception for buybacks made by unquoted trading companies where, provided certain conditions are met, the seller is instead treated as making a capital disposal. See the Income treatment for purchase of own shares and Capital treatment for purchase of own
Treasury shares following a share buy back
Treasury shares following a share buy backThis guidance note sets out the tax effect of a company retaining in treasury shares which it has bought back. For an overview of the purchase of own shares see the Purchase of own shares ― overview guidance note.See also Simon’s Taxes D.605.Tax treatment of treasury sharesAny limited company is permitted to retain repurchased shares. Such shares are known as ‘treasury shares’. It is unusual for the typical UK private company to have treasury shares because their use is limited. One example might be that the company expects, as at the time of
Statutory clearances
Statutory clearancesAvailable statutory clearancesA number of clearance procedures are provided for in the legislation. Only some of these are dealt with regularly by tax advisers and so it is only these most common clearance procedures that are covered in more detail below. A full list of the statutory provisions where advance clearance can be applied for can be found on the GOV.UK website.Clearances under the following provisions should be sent in a single application to HMRC’s Clearance and Counteraction Team. Market sensitive clearance applications should be marked for the attention of the ‘Team Leader’.Please click on the links where indicated for further guidance on drafting the relevant clearances:CTA 2010, s 1091DemergersSee the Demerger clearances guidance noteCTA 2010, s 1044Purchase of own sharesSee the Purchase of own shares clearances and reporting guidance noteITA 2007, s 247(1)(f)EIS shares ― acquisition by new companySee the Enterprise investment scheme deferral relief and Gain deferred through EIS becomes chargeable guidance notesCTA 2010, s 748 / ITA 2007, s 701Transactions in securitiesSee the Transactions in securities clearances guidance noteTCGA 1992, s 138(1)Share
Purchase of own shares clearances and reporting
Purchase of own shares clearances and reportingThis guidance note sets out the clearance procedure and reporting requirements associated with the capital treatment of a share buyback. See the Purchase of own shares ― overview guidance note for an overview of this area and the Capital treatment for purchase of own shares guidance note for details of the conditions for ‘capital treatment’ for a relevant shareholder on the purchase of own shares by a company.In situations where capital treatment applies to the repurchase of a company’s own shares, it is possible to obtain advance clearance from HMRC. The same clearance procedure may also be used for a repayment or redemption of shares. Regardless of whether advance clearance is sought, taxpayers seeking to treat amounts received from selling shares back to the company as capital must report details to HMRC within 60 days of the share buyback. Clearance applicationsAn application for clearance must:•be in
Company reorganisations ― overview
Company reorganisations ― overviewThis guidance note summarises some of the ways in which companies may reorganise their activities and some of the key tax considerations.A company may want to reorganise its activities or its share structure for a number of different reasons. The most common are to prepare for a sale (as often a buyer will want a new ‘clean’ company to hold the trade) or to return capital to investors.In addition to the reorganisations discussed below, a company may also undergo a demerger process. In simple terms, a demerger involves the separation of a company’s business into two or more parts, typically carried on by successor companies under the same ownership as the original company. For more details of demergers, see the Demergers - overview guidance note.Share for share exchangeA share for share exchange occurs when shares in one company are sold in exchange for new shares in the purchasing company. This type of transaction may also be called a ‘paper for paper’ transaction, as the consideration may also be loan notes as well as (or instead of) the issue of new shares.Usually, a transaction of this type (where at least 25% of the original company are being sold) will be structured to fall within the reorganisation provisions relating to capital gains tax. The conditions that must be met to fall within this treatment and the tax effect of doing so are set out in the Share for share exchange guidance note and guidance on the clearance application
Income treatment for purchase of own shares
Income treatment for purchase of own sharesThis guidance note sets out the tax effect of the ‘income treatment’ for a relevant shareholder on the purchase of own shares by a company. See the Purchase of own shares ― overview guidance note for an overview of this area.The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’.For shareholders who are UK resident individuals, the income treatment will apply by default to the repurchase. However, where the buyback is carried out by an unquoted trading company and specific conditions are met, the seller is treated as receiving a capital payment instead (ie the capital treatment applies). See the Capital treatment for purchase of own shares guidance note for further details on when the capital treatment can apply.For shareholders who are not UK resident individuals, only the income treatment can apply as one of the conditions that must be satisfied under the capital treatment is for the shareholder to be UK resident.For a corporate shareholder, it is likely that the distribution will fall within one of the dividend exemptions, and as a result the entire amount received on the buyback is brought into tax as a chargeable gain (ie the capital treatment applies to most corporate shareholders).
IHT planning for your client’s business ― overview
IHT planning for your client’s business ― overviewThis guidance note gives an overview of the ‘IHT planning for your client’s business’ sub-topic. How do changes to the business structure affect qualification for BPR? Where should the business premises held to maximise BPR? What is the best way to ensure that BPR is preserved in respect of lifetime succession planning and death planning? What are some practical tips that can be used to ensure that BPR is captured where possible?In this sub-topic, for ease of reference, ‘trading’ is used to mean a business that does not consist wholly or mainly of making or holding investments and ‘investment’ to mean a business that does consist wholly or mainly of making or holding investments though these are not terms used in the legislation and are generally best avoided in any technical analysis other than as shorthand.Practical tips for securing BPR
Legal and professional fees
Legal and professional feesStatutory references to ITTOIA 2005 relate to unincorporated businesses and CTA 2009 relate to companies unless otherwise stated.Legal and other professional fees can represent substantial costs to a business. A detailed analysis is often required for the purpose of preparing tax computations as this category of expenditure represents a significant risk for disallowed items.As a general rule, legal and professional fees are usually disallowed due to relating to:•items of a capital nature (this is the most likely category), or•not being wholly and exclusively incurred for the purpose of the tradeThe difficulty comes in applying these general rules to particular items of expenditure. Even where an item of expenditure is found to be revenue rather than capital in nature, it still needs to be shown that it also meets the wholly and exclusively test. The general concepts are discussed in the Wholly and exclusively and Capital vs revenue expenditure guidance notes. The legislation does not provide further detail on which fees are disallowable, and for this reason a substantial body of case law has developed regarding the tax treatment applied by the courts in respect of particular expenses. Where legal and professional fees are incurred in connection with another disallowable expense, they will most likely be disallowed too. Likewise, where legal and professional fees have been incurred in connection with expenditure that is specifically allowed, it is likely to be an allowable deduction. For further types of legal and professional fees, see Simon’s Taxes B2.449.Practical
A–Z of common adjustments to trading profits
A–Z of common adjustments to trading profitsWhy are adjustments to profit important?When calculating the profits of a trade, it is necessary to consider whether the expenses posted to the income statement are deductible for tax purposes. If not, the expenses must be added back to the profit in order to calculate the income tax or corporation tax liability (as appropriate).As there are many different trades which each incur a wide variety of expenditure that may require adjustment, a huge body of case law has evolved to supplement the fundamental principles set out in statute. The relevant concepts are explained in the Adjustment of profits ― overview guidance note.The table below lists some of the more common adjustments, together with links to additional sources of information including other guidance notes, Simon’s Taxes and HMRC’s manuals. Whether costs are allowable or not in practice often depends upon the specific trade in question and the surrounding facts. The table below should be used as a guide only.Navigation tip: press ‘Ctrl + F’ to search for a particular term within the table.Item of expenditureUsual tax treatmentFurther detailsAAdvertising hoardingsMore permanent structures used for advertising treated as capital, therefore disallowableSales, advertising and marketing; Simon’s Taxes B2.462; BIM42550Archives and record of business historyUsually deductible, akin to advertisingBIM42501BBad and doubtful debtsAllowable for traders. Dealt with under the loan relationships regime for companiesSimon’s Taxes B2.410; BIM42701Bank errors ― funds lostCurrent account deposits lost through bank
Capital treatment for purchase of own shares
Capital treatment for purchase of own sharesThis guidance note sets out the tax effect of the ‘capital treatment’ for a relevant shareholder on the purchase of own shares by a company. See the Purchase of own shares ― overview guidance note for an overview of this area.The tax treatment for the shareholders in a company on a purchase of own shares will fall into one of two categories ― either the ‘income treatment’ or the ‘capital treatment’. For shareholders who are individuals, the income treatment will apply by default to the repurchase. See the Income treatment for purchase of own shares guidance note for details.For a corporate shareholder, it is likely that the distribution will fall within one of the dividend exemptions, and as a result the entire amount received on the buyback is brought into tax as a chargeable gain (ie the capital treatment applies to most corporate shareholders). As a result, the substantial shareholding exemption can apply on the buyback. See the Substantial shareholding exemption ― overview guidance note for further details.For unquoted trading companies only, 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.For an illustration of how the gain or loss is computed under the capital treatment, see Example 1.This treatment only applies to purchases of own shares by unquoted trading companies that are not 51% subsidiaries of a quoted company, or to purchases of
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