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HMRC internal manual

Capital Gains Manual

Co.purchases own shares: general: introduction

The Companies Act 1985 allows a company to purchase its own shares if its Articles of Association authorise it to do so. To be valid, the terms of the purchase must provide for immediate payment. There are two parties to the transaction, the company making the purchase and the shareholder whose shares are purchased. For information about how the CT distributions legislation applies to the purchase of own shares see CTM17500+.

Before 1 December 2003, any shares purchased by a company were treated as cancelled. From 1 December 2003 the Companies Act 1985 was amended to allow repurchased shares to be held “in treasury” by “listed” companies (see CG50209). (For this purpose “listed” includes shares dealt in on the Alternative Investment Market (AIM) of the London Stock Exchange.) Shares held in treasury are not actually cancelled, and are held by the company. But their rights are suspended while they are in treasury, so that the company may not vote in respect of the shares or receive distributions in respect of them.

No chargeable gain or loss can arise to a UK incorporated company when it purchases its own shares. This is for two reasons.

  • Section 160(4) Companies Act 1985 provides any shares the company purchases shall be treated as cancelled. Therefore, the company does not acquire the shares on the purchase or dispose of them on the cancellation.
  • A company is owned by its shareholders. You cannot say a company owns itself. It does not own its shares before it issues them. Similarly it does not acquire the shares when it buys them from a shareholder. Therefore, a company’s shares are not assets in its own hands.
  • From 1 December 2003, it is possible for a “listed” company to purchase its own shares and hold them in treasury (see CG58600). (For this purpose “listed” includes shares dealt in on the Alternative Investment Market (AIM) of the London Stock Exchange.) While they are in treasury, the rights of the shares are effectively suspended. From 1 December 2003 FA03/S195(2) specifically provides that the purchase of its own shares by a company is not to be treated as the acquisition of an asset. Section 195 was introduced because of the new possibility of shares being held in treasury. It covers all cases where a company purchases its own shares. But the enactment of section 195 did not change the law in relation to shares that were purchased and immediately cancelled. It was always the case that the company did not acquire an asset when it purchased its own shares.

Because there is no acquisition by the company corresponding to the disposal by the shareholder none of the legislation which requires an acquisition and a disposal can apply. This means that

  • TCGA92/S171 intra-group transfer of assets, and
  • TCGA92/S18 transactions between connected persons

do not apply to a purchase of its own shares by a UK incorporated company.

The shareholder has sold his or her shares to the company and you compute the chargeable gain in the normal way. If ICTA88/S219 has applied to the purchase no further adjustment is required. An adjustment may be required if part of the amount received has been treated as a distribution.

CG58620+ deals with purchases treated as distributions.

CG58635+ deals with purchases covered by ICTA88/S219.