My client originally subscribed for 50,000 £1 shares when he set up his company. He now feels that the company is over capitalised and would like to return some of the share capital back to himself. He wonders whether the company could enter into a share buy-back or alternatively perhaps he could simply cancel some of the shares and receive the original capital.

A Purchase of Own Shares meeting the requirements of Part 18 Companies Act 2006 is unlikely to be treated as a capital distribution for tax purposes unless the purpose of the transaction is wholly or mainly to benefit the trade carried on by the company as required by s1033 CTA 2010. The only purpose given in the question is purely a personal benefit i.e. the shareholder would like part of his share capital back. When considering the tax issues of a Purchase of Own Shares, reference should be made to HMRC’s guidance which can be found at:

https://www.gov.uk/government/publications/seeking-clearance-or-approval-for-a-transaction

In any case if there are no other shareholders there would be no substantial reduction of the shareholder’s interest in the company as required by s1037 CTA 2010.

Although s1000 (1)B CTA 2010 states that a repayment of share capital is not a distribution, it is a “Transaction in Securities” within s684 ITA 2007 and so a close company repayment of share capital is likely to be taxed as an income distribution unless you can convince HMRC (by clearance under s701 ITA 2007) that there is no income tax advantage under s687 ITA 2007.

A Reduction of Share Capital meeting the requirements of Chapter 10 Part 17 Companies Act 2006 is equally within the scope of the above Transaction in Securities and so the same comments apply.

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