Most payments a company makes to its shareholders, regarding shares, will be qualifying distributions and be subject to Income Tax.
However, if certain conditions are met, the payment can be treated as an exempt distribution. An exempt distribution is a payment treated as consideration for the disposal of shares and is subject to CGT.
When a company purchases its own shares, excess paid over the amount of capital originally subscribed for the shares is usually treated as a distribution (a dividend). However, there are special provisions that enable an unquoted trading company or an unquoted holding company of a trading group to undertake a purchase of its own shares without making a distribution.
To check out the tax implications of an intended buy back, a clearance application may be made to HMRC. Under this procedure a company wishing to purchase its own shares can obtain advance confirmation from HMRC that the distribution arising will be exempt.
There are two situations where a purchase of a company’s own shares is not treated as a distribution:
- the company must be an unquoted trading company; and
- either Condition A: purchase benefiting a company’s trade or Condition B: purchase in connection with Inheritance Tax liability are required.
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