Entrepreneurs' Relief Available on Shares Sold to Own Company

The First-tier Tribunal (FTT) has ruled that a taxpayer was entitled to claim Entrepreneurs’ Relief (now known as Business Asset Disposal Relief) on the sale of shares back to his own company, rejecting HM Revenue & Customs’ (HMRC) argument that the payment should be taxed as an income distribution.

The decision provides valuable guidance for shareholders, family-run businesses and company directors considering share buy-backs as part of succession or retirement planning.

Background to the Case

The taxpayer, together with two others, had carried out a management buy-out of a training business in 1993. Years later, disagreements arose within the company’s management. It was ultimately decided that the taxpayer would retire to allow his son to implement a new management strategy.

As part of the agreed arrangements:

• the taxpayer gifted 38 of his 50 shares to his son;
• he gifted four shares to his grandchildren; and
• the company purchased the remaining eight shares for £4.8 million, cancelling them on acquisition.

The taxpayer reported the proceeds of the share buy-back as a capital gain and claimed Entrepreneurs’ Relief.

HMRC Challenge

HMRC opened an enquiry and issued a closure notice amending the taxpayer’s return. HMRC argued that the payment for the shares should be treated as an income distribution, rather than a capital receipt, on the basis that the statutory conditions in Section 1033 of the Corporation Tax Act 2010 were not met.

If correct, this would have prevented the taxpayer from claiming Entrepreneurs’ Relief and increased his tax liability by more than £1 million.

The taxpayer appealed to the FTT.

FTT: Share Buy-Back Benefited the Trade

The key issue before the Tribunal was whether the company’s purchase of the shares was “wholly or mainly for the purpose of benefiting the trade”, as required by Section 1033.

The FTT accepted evidence from the taxpayer’s son that, while the business had been profitable, its long-term sustainability depended on further investment. The taxpayer had opposed those investment proposals, creating ongoing management tensions.

The Tribunal found that:

• the taxpayer’s retirement was intended to unlock investment opportunities;
• his exit resolved management-level disputes; and
• removing him from the business was for the benefit of the trade.

The share buy-back was therefore undertaken to achieve a genuine commercial objective.

Transactions Considered Together

HMRC argued that the share buy-back should be considered separately from the gifts of shares to the taxpayer’s son and grandchildren. The FTT rejected this approach.

The Tribunal held that there was nothing in Section 1033 that prevented a trade benefit being achieved through a combination of actions. The evidence showed that the taxpayer would not have gifted shares or retired unless the company purchased his remaining shares, and the company was aware of this.

The transactions were therefore part of a single commercial arrangement designed to facilitate succession and benefit the business.

Price Did Not Undermine Trade Benefit

The FTT also rejected the suggestion that the price paid for the shares conferred a non-trade benefit. The price had been reached following negotiation, and the board believed it was necessary to secure the taxpayer’s agreement to exit.

The appeal was allowed, and the proceeds were correctly taxed as a capital gain qualifying for Entrepreneurs’ Relief.

Q&A: Key Tax Points Explained

What is Entrepreneurs’ Relief (Business Asset Disposal Relief)?

It is a capital gains tax relief that reduces the rate of tax on qualifying disposals of business assets, including certain shareholdings, subject to lifetime limits and conditions.

When can a share buy-back be taxed as capital rather than income?

A buy-back can be treated as a capital transaction where statutory conditions are met, including that it is wholly or mainly for the benefit of the company’s trade.

Why was the trade benefit test satisfied here?

Because the taxpayer’s exit enabled investment, resolved management disputes and allowed the business to pursue a sustainable strategy.

Can HMRC challenge succession planning arrangements?

Yes. HMRC frequently scrutinises share buy-backs involving family members or retiring shareholders, particularly where significant tax relief is claimed.

What does this decision mean for business owners?

It confirms that carefully structured share buy-backs linked to genuine commercial objectives can qualify for capital treatment and valuable tax reliefs.

Contact Us

Share buy-backs, succession planning and capital gains tax reliefs are complex areas that require careful planning and documentation. Our specialist Tax and Corporate solicitors advise business owners, directors and shareholders on structuring transactions to achieve legitimate tax efficiencies while managing HMRC risk.

If you are considering a share sale, company buy-back or business exit, contact Willett & Co Solicitors today for expert, practical advice.