Buying back shares out of capital

A private company can buy back its shares out of capital under Chapter 5 of Part 18 of the Companies Act 2006, but only after using any available profits, and only by following a fixed sequence: a directors’ statement of solvency with an auditor’s report, a special resolution within a week, public notice within a further week, a five week window for objections and payment between five and seven weeks after the resolution. Directors who sign the statement and the selling shareholder can be made to repay the money if the company goes into insolvent winding up within a year.

When does a buyback have to be paid out of capital?

Section 709 lets a private limited company, subject to any restriction or prohibition in its articles, pay for a redemption or purchase of its own shares otherwise than out of distributable profits or the proceeds of a fresh issue. Public companies cannot use this route.

The amount that may come from capital is the “permissible capital payment”. Under section 710 it is whatever is still needed to meet the price after first applying the company’s available profits and the proceeds of any fresh issue made for the purpose. Section 712 fixes how available profits are measured: by reference to “relevant accounts” prepared as at a date within the three months ending with the date of the directors’ statement, reduced by distributions and certain other payments made since those accounts. In practice this means drawing up up to date accounts, often management accounts, before the statement is signed.

Two alternatives are worth ruling out first. Small purchases can use the annual allowance explained in small share buybacks: the de minimis exemption. A reduction of share capital supported by a solvency statement can create distributable reserves, and ICAEW’s helpsheet notes that the out of capital procedure is used infrequently because simpler routes exist. For the overall buyback rules and the seller’s tax position, see company purchase of own shares.

What must the directors’ statement say?

Section 714 requires the directors to state the amount of the permissible capital payment and that, having made full inquiry into the company’s affairs and prospects, they have formed the opinion that:

• immediately after the payment there will be no grounds on which the company could be found unable to pay its debts, taking into account all liabilities including contingent and prospective liabilities; and
• for the year after the payment, having regard to their intentions for the business and the financial resources they expect to be available, the company will be able to carry on business as a going concern and pay its debts as they fall due.

Article 5 of the Companies (Shares and Share Capital) Order 2009 prescribes the form: the statement must be in writing, say it is made under section 714, be signed by each of the company’s directors and state whether the company’s business includes that of a banking company or an insurance company. Under section 715, a director who makes the statement without reasonable grounds for the opinion commits an offence punishable on indictment by up to two years’ imprisonment or a fine.

What does the auditor’s report cover?

Section 714(6) requires a report addressed to the directors by the company’s auditor, annexed to the statement, stating that the auditor has inquired into the company’s state of affairs, that the permissible capital payment has in their view been properly determined under sections 710 to 712, and that they are not aware of anything indicating that the directors’ opinion is unreasonable in all the circumstances. The section contains no exception for audit exempt companies, so a small company that does not normally have an audit needs to plan for this report and its cost.

How are the resolutions passed?

Two shareholder approvals are involved. The buyback contract itself must be approved in advance under section 694, which since 30 April 2013 needs only an ordinary resolution unless the articles say otherwise. The payment out of capital needs a special resolution under section 716, passed on the date of the directors’ statement or within the following week.

Section 717 applies the same voting restriction as for the contract: on a written resolution a member holding shares being bought is not an eligible member, and at a meeting the resolution fails if it would only have passed because of those votes. Section 718 requires the directors’ statement and auditor’s report to be sent to every eligible member with a written resolution, or made available at the meeting; if not, the resolution is ineffective. Companies House guidance says special resolutions are delivered to it within 15 days of being passed.

What publicity is required?

Within the week after the special resolution, section 719 requires the company to:

• publish a notice in the Gazette stating that the company has approved a payment out of capital, the amount of the permissible capital payment, the date of the resolution, where the statement and report can be inspected, and that any creditor may apply to court within five weeks of the resolution to prevent the payment; and
• either publish a notice to the same effect in an appropriate national newspaper or give written notice to each of its creditors.

A copy of the directors’ statement and auditor’s report must be delivered to Companies House no later than the day the first of those notices is published or given. Under section 720 the statement and report must be kept available for inspection, free of charge to any member or creditor, from that first notice until five weeks after the resolution, at the registered office or the company’s alternative inspection location.

Can members or creditors stop the payment?

Section 721 allows any creditor, and any member who did not consent to or vote for the resolution, to apply to court within five weeks of the resolution to cancel it. The court may adjourn so that dissenting members are bought out or creditors protected, and must then cancel or confirm the resolution, on terms if it thinks fit, including altering the payment timetable. Companies House guidance says the applicants file form SH16 immediately, the company files form SH17 when it is served, and a copy of the court’s order must be delivered within 15 days under section 722.

When is the payment made and what is filed afterwards?

Section 723 requires the payment out of capital to be made no earlier than five weeks and no later than seven weeks after the special resolution, unless the court has altered the timing. Section 691 still requires the shares to be paid for on purchase.

• Within 28 days of the shares being delivered to the company, file form SH03 (section 707). Companies House guidance says that where the consideration is above £1,000 the form goes to HMRC with the Stamp Duty first; see Stamp Duty on share buybacks.
• Shares bought out of capital cannot be held in treasury, because section 724 applies only to purchases out of distributable profits. They are cancelled, and form SH06 with a statement of capital is due within the same 28 days (section 708).
• Section 734 sets the accounting: if the permissible capital payment is less than the nominal value of the shares, the difference goes to the capital redemption reserve; if it is more, the excess can be set against that reserve, share premium, share capital or an unrealised revaluation reserve. See accounting for a purchase of own shares.

What does the timetable look like?

Illustration only. A company plans to buy back a retiring director’s shares partly out of capital.

Step	Date	Rule
Management accounts drawn up	30 September 2026	Within three months ending with the statement (section 712)
Directors’ statement and auditor’s report signed	Monday 2 November 2026	Section 714
Special resolution passed	Wednesday 4 November 2026	Within a week of the statement (section 716)
Statement and report filed; Gazette notice and letters to creditors	By Wednesday 11 November 2026	Within a week of the resolution (section 719)
Objection period ends	Wednesday 9 December 2026	Five weeks (section 721)
Payment window	9 December to 23 December 2026	Five to seven weeks (section 723)
SH03 and SH06 filed	Within 28 days of delivery of the shares	Sections 707 and 708

A payment made outside the five to seven week window does not comply with section 723, so it helps to set the resolution date with bank holidays and the seller’s availability in mind.

What personal risk do the directors and the seller carry?

Section 76 of the Insolvency Act 1986 applies if the company goes into winding up within one year of the payment out of capital and its assets are not enough to pay its debts and the costs of the winding up. The seller can be required to contribute up to the amount of the capital payment made for their shares, and the directors who signed the statement are jointly and severally liable with them, unless a director shows they had reasonable grounds for their opinion. A director or seller who pays can ask the court to order others to contribute.

Common mistakes include using stale accounts outside the three month window, letting the seller vote, forgetting to send the statement and report with a written resolution, publishing late and paying before the five week objection period has ended.

Company directors can protect the business against the cost of an HMRC check with tax investigation insurance, which pays up to £100,000 of accountant’s fees with Solar Protect. Read how our cover works or get a quote.

Related Accountapedia entries

• Ways to return capital to shareholders
• Redeemable shares
• Ordinary and special resolutions
• Which resolutions must be filed at Companies House
• Can a share buyback be paid in instalments
• Buying a company’s assets back from the liquidator
• Buying out a fellow shareholder
• SDLT when buying out a co owner’s share
• Moving back into a property you have let out

Sources

• legislation.gov.uk: Act 2006 c. 46, section 709
• legislation.gov.uk: Act 2006 c. 46, section 710
• legislation.gov.uk: Act 2006 c. 46, section 712
• ICAEW: Purchase of own shares
• legislation.gov.uk: Act 2006 c. 46, section 714
• legislation.gov.uk: SI 2009/388, article 5
• legislation.gov.uk: Act 2006 c. 46, section 715
• legislation.gov.uk: Act 2006 c. 46, section 694
• legislation.gov.uk: Act 2006 c. 46, section 281
• legislation.gov.uk: Act 2006 c. 46, section 716

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.