Can a share buyback be paid in instalments

Q: What does a staged buyback look like?

Illustration only. Ellis Ltd agrees to buy back all 300 of a retiring director's shares for £90,000 but has distributable reserves of only £35,000. The members approve a contract covering three completions of 100 shares at £30,000 each, on 1 December 2026, 1 December 2027 and 1 December 2028. The first 100 shares are delivered and £30,000 paid on 1 December 2026; SH03 and SH06 follow within 28 days. Before each later completion the board checks distributable reserves for that tranche. If reserves fall short, section 735 means the director cannot sue the company for damages. For tax, the director still holds 200 shares after the first completion, so the substantial reduction and connection tests need checking at each completion, not just at the end. Common mistakes are writing "price payable in three instalments" into a single purchase, transferring all the shares on day one while leaving part of the price unpaid, and paying an option fee out of capital. 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.

No. Section 691(2) of the Companies Act 2006 requires shares bought back by a limited company to be paid for on purchase, so an ordinary buyback cannot leave part of the price outstanding as a debt to the seller. Companies that cannot afford the whole price at once instead split the purchase into separate completions, each paid in full, or use option agreements that let the company buy blocks of shares later; the only statutory exception is a private company buying shares for an employees’ share scheme.

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Why can a buyback not be paid in instalments?

Section 691(1) says a limited company may not purchase its own shares unless they are fully paid, and section 691(2) says that where it does purchase them, “the shares must be paid for on purchase”. HMRC’s Capital Gains Manual at CG58655 puts it as a requirement that the consideration be paid in full on completion, and CG58600 says the terms of the purchase must provide for immediate payment to be valid. ICAEW’s helpsheet on purchase of own shares states that the purchase cannot be paid for over a period of time or by instalments.

The consequences of getting it wrong are serious. Section 658 prohibits a limited company from acquiring its own shares except in accordance with Part 18. If it purports to do so, the acquisition is void and an offence is committed by the company and every officer in default, with up to two years’ imprisonment on indictment. A buyback agreed on deferred terms can therefore leave the seller still owning the shares in law, and the company and directors exposed.

Paying in full on purchase also means the funding test in section 692 is applied to money the company actually has when it takes the shares back, rather than to profits it hopes to earn later.

Is there any exception?

One. Section 691(3), added from 30 April 2013, disapplies the payment on purchase rule where a private limited company is buying shares for the purposes of or pursuant to an employees’ share scheme. The explanatory note to the 2013 regulations says this allows such a company to pay for its shares by instalments. These purchases have their own authority procedure under section 693A, and, where funded from capital, a simplified solvency statement route under sections 720A and 720B. The exception does not help with a founder or investor exit that is not part of an employees’ share scheme.

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How does a staged buyback work?

HMRC’s manual describes the “multiple completion method”: a contract to purchase the shares is made at the beginning and the shareholder sells the shares back to the company in tranches. Each tranche is a completed purchase, paid for in full when that tranche completes. In company law terms:

the contract is approved in advance by resolution under section 694, with the seller excluded from voting on the shares being bought (section 695) and the contract made available to members (section 696);
at each completion the company must have the funding section 692 requires, normally distributable reserves, for that tranche;
form SH03 is due within 28 days of each delivery of shares (section 707), although Companies House guidance says one SH03 may cover purchases on different dates and under different contracts;
cancelled shares need form SH06 and a statement of capital within 28 days (section 708), and Stamp Duty is dealt with on the SH03; see Stamp Duty on share buybacks.

The seller keeps the shares not yet bought, with the rights attached to them, until each later completion.

What are the tax traps in a staged buyback?

CG58655 warns that the method “can be fraught with complexities for both company and tax law” and lists points HMRC checks where the seller wants capital treatment under section 1033 of the Corporation Tax Act 2010:

for company law the legal ownership of the shares is considered, but for the tax rules it is beneficial ownership, because of section 1048;
the “substantially reduced” test in section 1037, that the seller’s interest after the purchase is less than 75% of the interest before, needs to be met each time a tranche completes;
the seller must not be connected with the company after each stage under section 1042, and the connection test follows legal ownership, so a seller still holding a large block between tranches may fail it.

HMRC also notes that deferred consideration does not necessarily meet the conditions for capital treatment. A seller who would otherwise qualify can lose it through the way the buyback is staged; the wider rules are in share buyback tax treatment.

How are option structures used instead?

Section 694(3) allows the approved contract to be one that does not itself amount to a contract to buy the shares, but under which the company may become entitled or obliged to buy them, subject to conditions. This is the statutory basis for put and call options over the seller’s remaining shares, a “contingent purchase contract”.

A typical structure has the company buy a first block on day one and take options over further blocks exercisable in later years, when profits allow. Each exercise is a separate purchase that must be paid for in full on completion. Section 705 requires any payment the company makes to acquire the option rights, to vary an approved contract or to be released from its obligations, to come out of distributable profits; if not, no purchase may be made under the contract, or the release is void. Drafting points are covered in share option agreements.

What happens if the company cannot complete a later tranche?

Section 735 protects the company rather than the seller. The company is not liable in damages for failing to purchase shares it has agreed to buy, and the court will not order specific performance if the company shows it cannot meet the cost out of distributable profits. If the company is wound up, the terms can be enforced against it only in limited cases, and any amount due then ranks behind all other debts and behind shares with preferred rights. A seller relying on later tranches is therefore taking a real risk and may want to negotiate some form of security or commitment from the remaining shareholders.

What about lending the price back to the company?

CG58655 also describes the “loan back” method: the buyback completes in one stage and is paid in full, and the seller then lends part of the money back to the company, or another shareholder lends to the company instead. HMRC says the points to consider are whether the seller stays connected with the company because they become entitled to loan capital under section 1062(2)(b), and whether the arrangement still satisfies the requirement that the purchase is made wholly or mainly to benefit the company’s trade. The company law requirement to pay on purchase is met because the price is paid in full; the loan is a separate transaction.

What does a staged buyback look like?

Illustration only. Ellis Ltd agrees to buy back all 300 of a retiring director’s shares for £90,000 but has distributable reserves of only £35,000.

The members approve a contract covering three completions of 100 shares at £30,000 each, on 1 December 2026, 1 December 2027 and 1 December 2028.
The first 100 shares are delivered and £30,000 paid on 1 December 2026; SH03 and SH06 follow within 28 days.
Before each later completion the board checks distributable reserves for that tranche. If reserves fall short, section 735 means the director cannot sue the company for damages.
For tax, the director still holds 200 shares after the first completion, so the substantial reduction and connection tests need checking at each completion, not just at the end.

Common mistakes are writing “price payable in three instalments” into a single purchase, transferring all the shares on day one while leaving part of the price unpaid, and paying an option fee out of capital.

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.

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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.