Tax on Company Share Buyback

100% shareholder reducing shares at par value

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Can anyone advise on the following as none of the online examples seem to fit this scenario. If a 100% shareholder has 10,000 shares issued at £1 each and the company buys back 9,900 shares at par value reducing the shareholding to 100 shares, what if any are the tax consequences on the shareholder?

The shareholder has held the shares for over 5 years but was not the original subscriber. The company has sufficient reserves and cash balances to cover the £9,900

The combined value of the remaining shares remain the same as the previous 10,000 less the reduced cash of £9,900 so the value of the shares bought back are fairly valued at £9,900

From information gleaned online, the buyback can be treated as either income or a capital gain. When it is income it is the amount exceeding the share capital which in this case would be £0. Would this also apply if the shareholder was not the original subscriber to the shares ?  If it is a capital gain, would the same apply or would the whole £9,900 be a capital gain ?

Replies (5)

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By SteveHa
10th Mar 2023 10:37

Assuming that the shares were fully paid when originally issued, would this not just be a return of share capital?

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Replying to SteveHa:
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By Dib
10th Mar 2023 13:02

What he said!

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By Ruddles
10th Mar 2023 11:36

I'm not convinced by your statement that "the value of the shares bought back are fairly valued at £9,900"

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By Tax Dragon
10th Mar 2023 11:47

It's brilliant logic though. Company pays X for the shares. Company is X poorer. Value of remaining shares is therefore X less. Therefore shares bought must have been worth X.

Of course, this same logic 'works' whatever number X is.

Or, more accurately, this logic doesn't work for any X. (Which I know is your point. But I work in tax. I need things explained to me. Ask Lion.)

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Replying to Tax Dragon:
By Ruddles
10th Mar 2023 12:05

Agreed

The correct procedure is (more than) hinted at in the first response on this thread.

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