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HMRC internal manual

Trusts, Settlements and Estates Manual

Capital items that are income for tax purposes: company buys its own shares

Where a company buys its own shares from trustees the distribution is treated as income. That income is chargeable at the dividend trust rate, with a credit at the dividend ordinary rate. The chargeable income excludes any amount treated as the income of the settlor, or arising under a charitable trust, or from investments, deposits or other property held for retirement benefits or pension scheme trusts.

Changes were made to ICTA/S686A in FA 2006 that incorrectly charged the trustees to tax on the entire payment, rather than on the qualifying distribution as intended. FA 2007 corrected the position and applied it retrospectively. This means that if any trustees received a payment from a company buying back its own shares in 2006-07, they are chargeable only on the qualifying distribution.

The relevant legislation can now be found in ITA/Sections 481 and 482.

Where CTA 2010/S1033 applies a sale of shares is not treated as a distribution. So if the conditions in S1033 are satisfied, ITA/Sections 481 and 482 will not apply to a company purchase of own shares. You should not apply ITA/Sections 481 and 482 if the company in question has received ‘clearance’ that S1033 does apply.