A share buyback suits a retiring owner when the company will carry on with other shareholders; a members’ voluntary liquidation (MVL) suits an exit where everyone is leaving and the company is closing. Both can produce a capital gain taxed at 18% under Business Asset Disposal Relief (BADR) for disposals from 6 April 2026, but a buyback only gets capital treatment if strict statutory conditions are met, while an MVL is capital by default unless an anti avoidance rule applies.

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What is the basic difference between the two routes?

In a buyback the company uses its own money to purchase the retiring owner’s shares, which are then cancelled or held in treasury. The company keeps trading and the remaining shareholders end up owning all of it. The company law steps, including the shareholder resolution and the need for distributable profits, are covered in company purchase of own shares.

In an MVL the shareholders resolve to wind up a solvent company, a licensed insolvency practitioner is appointed as liquidator, debts are paid and the surplus is distributed to the members. Gov.uk describes an MVL as the route where the company can pay its debts and the owner wants to retire, wants to step down from a family business nobody else wants to run, or simply does not want to run the business any more. The process is explained in members’ voluntary liquidation.

So the first question is not tax at all. If the business is to continue under the remaining owners, an MVL is the wrong tool. If nobody is continuing, a buyback of one owner’s shares leaves the others with a company they do not want.

How does each route get capital treatment?

Buyback. HMRC explains at CG58610 that where a company buys its own shares, any excess over the amount originally subscribed is treated as a distribution under section 1000(1) paragraph B of the Corporation Tax Act 2010 (CTA 2010) and taxed as dividend income, unless sections 1033 to 1048 apply. Section 1033 turns the payment into a capital receipt only if the company is an unquoted trading company (or holding company of a trading group) and, in the usual case, Condition A is met:

  • the purchase is made wholly or mainly to benefit the company’s trade, and is not part of arrangements to let the owner share in profits without a dividend or to avoid tax;
  • the seller is UK resident (section 1034);
  • the shares have been owned for five years ending with the purchase (section 1035);
  • any remaining interest of the seller and associates is substantially reduced, meaning not more than 75% of the previous interest (section 1037); and
  • immediately afterwards the seller is not connected with the company, which section 1062 defines as holding or being entitled to more than 30% of the ordinary share capital, the loan and share capital, the voting power or the assets on a winding up.

HMRC’s clearance guidance gives a controlling shareholder retiring as a director to make way for new management as an example of a purchase that will usually benefit the trade. The detail is in share buybacks: capital or income.

MVL. Section 1030 CTA 2010 says a distribution in respect of share capital in a winding up is not a distribution. HMRC confirms at CG58620 that a distribution in the course of winding up is a capital distribution, treated under section 122 of the Taxation of Chargeable Gains Act 1992 as a disposal of an interest in the shares. No clearance, trade benefit or five year test is needed. The risk instead is the targeted anti avoidance rule in section 396B of the Income Tax (Trading and Other Income) Act 2005, which treats the distribution as income where the individual had at least a 5% interest, the company was close, the individual carries on or is involved in a similar trade or activity within two years after the distribution, and a main purpose was to reduce income tax. See the TAAR on distributions in a winding up.

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How does BADR apply under each route?

For shares, gov.uk says that for at least two years up to the disposal the individual must be an employee or office holder, the company must be trading, and it must be the individual’s personal company, with at least 5% of the shares and votes and a 5% economic interest. The BADR rate is 18% for disposals from 6 April 2026, compared with 14% in 2025 to 2026, and the lifetime limit is £1 million of gains (CG64125). The general conditions are in Business Asset Disposal Relief.

The two routes meet these tests differently:

  • Buyback. The company is still trading, so Condition A in section 169I(6) TCGA 1992 must be met for the two years ending with the date of the buyback. The owner should therefore stay a director or employee until completion. HMRC’s clearance guidance warns that a buyback is unlikely to benefit the trade if the seller keeps another connection such as a directorship, so the usual approach is to resign at completion, not months before.
  • MVL. Where trading has stopped before or on the liquidation, Condition B in section 169I(7) lets the two year tests be met in the period ending with cessation, provided the disposal is within three years after that date. Every distribution, including interim ones, has to fall within that window. More detail is in BADR on a members’ voluntary liquidation.

Without BADR, gains are taxed at 18% or 24% from 6 April 2026, after the £3,000 annual exempt amount. Income treatment is much more expensive: dividend tax for 2026 to 2027 is 10.75%, 35.75% or 39.35% depending on the band.

Which route is quicker and what does it cost?

Point Buyback MVL
Minimum ownership for capital treatment Five years (section 1035) None beyond BADR’s two years
Funding Distributable profits or a fresh issue (section 692 Companies Act 2006), or capital under a separate procedure Company’s assets after paying all debts
Payment CTM17505 says full payment must be made on purchase; a loan account is not payment Interim and final distributions by the liquidator
Stamp duty Usually 0.5% on the SH03 return where the price is over £1,000 None on distributions
Professional costs Legal and accounting fees; optional HMRC clearance under section 1044 Liquidator’s fees plus legal and accounting costs

An MVL has its own timetable. Under section 89 of the Insolvency Act 1986 the directors make a statutory declaration that the company can pay its debts with interest within a stated period of not more than 12 months; it must be made within the five weeks before the winding up resolution and filed within 15 days after it, and the resolution is advertised in the Gazette within 14 days. Stamp duty on buybacks is explained in stamp duty on share buybacks, and the problems of paying in stages in buybacks paid in instalments.

Can you show a worked example?

Illustration only. Alan owns 40% of a trading company and has been a director for twenty years; he paid £40 for his shares. His two co owners want to carry on. The company has enough cash and distributable reserves to buy his shares for £800,000.

  • If the section 1033 conditions are met, Alan has a gain of £799,960. After the £3,000 annual exempt amount and with BADR at 18%, the tax is about £143,450.
  • If they are not met, £799,960 is a distribution taxed mostly at 39.35%, which would be more than twice as much.

Now suppose instead that all three owners are retiring and the company stopped trading on 30 June 2026 with £1.2 million of net assets. A buyback makes no sense. In an MVL each owner’s distributions are capital, and BADR remains available on distributions made within three years of 30 June 2026, subject to each owner’s own lifetime limit. A distribution made after that window would not qualify.

What mistakes come up most often?

  • A spouse keeping shares after a buyback. HMRC treats spouses or civil partners living together, and children under 18, as associates whose holdings are combined with the seller’s for both the 75% and 30% tests.
  • Resigning early. Leaving the board well before a buyback can break the BADR officer or employee condition.
  • Starting a similar business after an MVL. Carrying on or being involved in a similar trade within two years can bring the TAAR into play.
  • Letting the three year window close. A company left dormant with cash after trading stops can lose BADR on a later liquidation.
  • Skipping clearance without checking the conditions. CTM17570 says section 1044 clearance is not a statutory requirement, but applying before payment lets HMRC confirm in advance whether section 1033 will apply.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 24 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.