A limited company can buy back its own shares under Part 18 of the Companies Act 2006, provided the shares are fully paid, they are paid for on purchase and the price comes from distributable profits, a fresh issue of shares or, for a private company, a permitted payment out of capital. For the seller, the payment is taxed as an income distribution unless the capital treatment conditions in section 1033 of the Corporation Tax Act 2010 are met.

When is a share buyback used?

In owner managed companies a buyback is most often used when a shareholder retires, falls out with the others or dies, and the remaining shareholders do not want to buy the shares personally. The company itself pays, the shares are usually cancelled and the remaining shareholders’ percentage holdings rise automatically. Because the money leaves the company, the Companies Act protects creditors through strict funding and procedural rules, and HMRC applies its own tests to decide whether the seller has a capital gain or an income distribution.

What conditions must the company meet?

  • Power: section 690 allows a limited company with a share capital to buy its own shares, subject to any restriction or prohibition in its articles. It cannot buy back if no shares other than redeemable or treasury shares would remain.
  • Fully paid, paid on purchase: section 691 requires the shares to be fully paid and paid for on purchase. A private company buying for an employees’ share scheme is the exception, so an ordinary buyback cannot be paid in instalments.
  • Funding: section 692 requires payment out of distributable profits or the proceeds of a fresh issue made to fund the purchase, and any premium generally out of distributable profits. Distributable profits are accumulated realised profits less accumulated realised losses (section 830).
  • Small buybacks out of capital: if its articles authorise it, a private company can also buy back out of capital, without the full Chapter 5 procedure, up to the lower of £15,000 or the nominal value of 5% of its fully paid share capital in a financial year (section 692(1ZA)).

How is an off market buyback approved?

A buyback from a shareholder of a private company is an “off market” purchase under section 693. Section 694 requires the contract to be approved by a resolution of the company before it is entered into, or the contract must say no shares can be bought until its terms are approved. The word “special” was removed from section 694 by SI 2013/999 from 30 April 2013, so section 281(3) means an ordinary resolution suffices unless the articles demand more.

Two safeguards apply. Under section 695, the selling shareholder is not an eligible member on a written resolution, and on a resolution at a meeting the resolution fails if it would not have passed without the seller’s votes on the shares being bought. Under section 696, a copy or memorandum of the contract must be sent to every eligible member with a written resolution, or be available at the registered office for at least 15 days before, and at, the meeting. Once concluded, the contract must be kept available for inspection for ten years from completion (section 702).

How does a private company buy back out of capital?

Where profits are not enough, Chapter 5 of Part 18 lets a private company make a “permissible capital payment”, the amount needed after first using available profits and any fresh issue proceeds (sections 709 and 710). The procedure is strict:

  1. The directors make a statement of the permissible capital payment and their opinion that the company can pay its debts immediately after the payment and throughout the following year, taking into account contingent and prospective liabilities, with a report from the company’s auditor annexed (section 714). A statement made without reasonable grounds is an offence carrying up to two years’ imprisonment on indictment (section 715).
  2. A special resolution approves the payment on, or within the week after, the date of the directors’ statement (section 716), with the seller’s votes excluded as before (section 717).
  3. Within the week after the resolution the company publishes a notice in the Gazette and either a notice in an appropriate national newspaper or written notice to each creditor, and delivers the statement and report to Companies House (section 719).
  4. Any member who did not consent, or any creditor, may apply to court within five weeks to cancel the resolution (section 721).
  5. The payment must be made no earlier than five weeks and no later than seven weeks after the resolution (section 723).

What happens to the shares and what must be filed?

Bought back shares are cancelled and issued share capital falls by their nominal value, unless the purchase was out of distributable profits and the company holds them as treasury shares (sections 706 and 724). Where shares are bought wholly out of profits, the nominal value cancelled must be transferred to a capital redemption reserve (section 733).

Within 28 days of the shares being delivered to the company it must file a return on form SH03 (section 707) and, where shares are cancelled, notice of cancellation on form SH06 with a statement of capital (section 708). Section 66 of the Finance Act 1986 treats the SH03 as an instrument of transfer chargeable to Stamp Duty (HMRC manual STSM075020). Companies House says that if the price is above the £1,000 threshold the SH03 goes to HMRC first, and the HMRC letter confirming the duty is sent with it to Companies House. GOV.UK gives the usual rate on shares as 0.5%.

How is the seller taxed?

By default, HMRC’s Capital Gains Manual at CG58610 explains that any excess of the price over the shares’ subscription price is a distribution under section 1000(1)B CTA 2010, taxed on an individual like a dividend, with the return of capital element still counted for capital gains tax. See dividend tax rates.

Section 1033 CTA 2010 overrides this, so the whole payment is a capital disposal, if the company is an unquoted trading company (or unquoted holding company of a trading group) and either Condition A or Condition B is met. Condition A requires:

  • the purchase is made wholly or mainly to benefit the trade and is not part of a scheme mainly to let the seller share in profits without a dividend, or to avoid tax;
  • the seller is UK resident in the tax year of purchase (section 1034);
  • the seller has owned the shares for five years, reduced to three where inherited, with ownership by a spouse or civil partner living with the seller counted in some cases (sections 1035 and 1036);
  • if the seller keeps any shares, their interest is reduced to no more than 75% of what it was, counting associates (section 1037);
  • the seller is not connected with the company afterwards, meaning broadly not holding more than 30% (sections 1042 and 1062), and anything within one year is treated as part of the same arrangement.

Condition B applies where substantially the whole payment is used to pay inheritance tax charged on a death within two years of it. HMRC’s Company Taxation Manual at CTM17507 notes that AIM shares count as unquoted for this purpose. A company can apply for advance clearance under section 1044, which CTM17570 says is not a statutory requirement, and a company treating a payment as within section 1033 must make a return to HMRC within 60 days of the payment (section 1046). If capital treatment applies, check whether Business Asset Disposal Relief is available and the relevant capital gains tax rates.

What does a buyback look like in numbers?

Illustration only. A trading company has 100 £1 ordinary shares. A retiring director has held 30 of them, subscribed at par, for twelve years. The company agrees to buy all 30 for £150,000 out of distributable profits.

  • After completion the seller holds nothing, so the substantial reduction and connection tests are met. If the other Condition A requirements are met, the seller has a capital disposal for £150,000.
  • If section 1033 did not apply, £149,970 (the price less the £30 subscribed) would be a distribution.
  • The 30 shares are cancelled, issued share capital falls to £70 and £30 goes to the capital redemption reserve.
  • Stamp Duty at 0.5% of £150,000 is £750, paid on the SH03 before filing.

What are the common mistakes?

  • Agreeing to pay by instalments, which breaches the requirement to pay on purchase.
  • Not checking distributable reserves in the latest accounts before signing; see how to pay dividends legally for the same test.
  • Letting the seller vote on the resolution, or skipping the contract disclosure under section 696.
  • Missing the 28 day SH03 and SH06 deadlines or the Stamp Duty step.
  • Ignoring shares held by the seller’s associates when testing the 75% and 30% thresholds.
  • Assuming a payment out of capital can be made without an auditor’s report where the company is exempt from audit; section 714 requires a report by the company’s auditor. A reduction of share capital is sometimes used instead to create reserves first.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.