CG58635 - Co.purchases own shares: capital treatment: Condition A – benefit of a trade

One of the requirements to satisfy Condition A is that the purchase of own shares by the company must be for the benefit of a trade carried on by it. The company should be able to sufficiently satisfy HMRC that the purchase is wholly or mainly made for the benefit of its or its 75% subsidiary’s trade.

Statement of Practice 2/82 Company’s purchase of own shares provides examples of where the benefit of trade test is likely to have been met. Although the Statement of Practice is written in relation to ICTA 88, the ‘test’ is still relevant. Each scenario should be considered case by case and on a basis of the facts pertaining to that scenario.

The test is not satisfied where the purchase serves the personal or wide commercial interest of the shareholder selling the shares or where there is a non-trading reason.

Examples of where the benefits of trade test is satisfied, include

• Where a disagreement between shareholders over the management of the company is leading to an adverse effect on the trade of the company, then the purchase of own shares removes the dissenting shareholder.
• On a death of a shareholder where the personal representative or beneficiaries do not want to keep the shares.
• An outside provider of equity finance wishes to withdraw their investment so the company initiates a purchase of own shares.
• The proprietor of the company wishes to retire, paving the way for new management – generally they should resign as an officer but remaining in position over a short term handover period can be accepted depending on the facts.
• Exceptionally, where the retiring director has kept a shareholding, not exceeding 5% of issued share capital, for sentimental reasons.

In the context of these examples, generally, the entire interest has to be given up by the shareholder for the trade benefit test to apply. However where the company does not purchase the entire interest because of lack of funds but shows intention to do so once able to, then on the basis of supporting evidence, the benefit to trade test may be satisfied. The company must show that the original purchase was for the purpose of benefiting the trade. It should be noted that a disposal of the entire interest by the shareholder is not a requirement for the Condition to be met.