Share Buybacks – How Companies Can Repurchase Shares Tax-Efficiently

What is a share buyback and why companies use them

A share buyback, also known as a share repurchase, is a transaction where a company buys back its own shares from one or more shareholders. Once repurchased, the shares are usually cancelled, reducing the company’s issued share capital, although in limited cases they may be held in treasury.

Share buybacks are commonly used to restructure ownership, return value to shareholders, resolve shareholder exits, or simplify complex shareholdings. They can be an effective alternative to dividends, third-party sales, or shareholder disputes, particularly in private companies where liquidity options are limited.

Although share buybacks are well established under UK law, they are tightly regulated and involve overlapping company law, tax, accounting, and insolvency considerations. A poorly planned buyback can be invalid, tax-inefficient, or expose directors to personal liability, making specialist advice essential. Share buybacks are governed by Part 18 of the Companies Act 2006, which contains detailed procedural and funding requirements.

When a Share Buyback is the Right Solution

Common commercial reasons for share buybacks
Companies and shareholders choose share buybacks for a variety of strategic reasons, including:

• Facilitating a shareholder exit, particularly where there is no external buyer or where remaining shareholders want to retain control of the business. A buyback can provide a clean and discreet exit route.
  
• Resolving shareholder disputes, allowing one party to leave without forcing a sale of the company or prolonged litigation.
  
• Succession planning, enabling founders or family members to exit gradually while transferring ownership to the next generation or management.
  
• Simplifying ownership structures, such as removing dormant, minority, or legacy shareholders whose continued involvement no longer aligns with the business.
  
• Returning surplus cash, where the company has excess funds that are not required for working capital or growth.
  

In each case, the buyback must be carefully aligned with the company’s financial position and long-term strategy.

How Share Buybacks Work Under UK Law

The legal framework explained clearly
Share buybacks are governed primarily by Part 18 of the Companies Act 2006. The core provisions are found in sections 690 to 708, which regulate how shares may be purchased, funded, and approved.

Most private company share buybacks involve:

• A contract between the company and the selling shareholder.
  
• Approval by shareholders, usually by ordinary resolution.
  
• Payment funded from distributable reserves or the proceeds of a fresh issue of shares.
  

Failure to comply with the statutory process under section 691(2) of the Companies Act 2006 can render the buyback void and may require the selling shareholder to repay the consideration received.

On-market vs off-market buybacks
Private companies almost always carry out off-market buybacks, meaning the shares are purchased under a specific agreement with the shareholder rather than through a stock exchange. Off-market buybacks require prior shareholder approval of the buyback contract or its terms.

Public companies have additional options and regulatory obligations, but these are less commonly relevant in owner-managed or private business contexts.

Funding a Share Buyback

Distributable reserves and capital maintenance
The most common source of funding for a share buyback is distributable profits. The capital maintenance rules are strict, and companies cannot use share capital itself to fund a buyback unless specific statutory procedures are followed.

Where distributable reserves are unavailable, sections 692 to 708 of the Companies Act 2006 permit limited additional methods of funding, subject to detailed solvency and filing conditions.

Alternative options may include:

• Creating distributable reserves through a capital reduction, which can unlock funds for a buyback (see our guide on Capital Reductions for further detail on how this can be achieved lawfully).
  
• Funding the buyback from the proceeds of a fresh issue of shares, which preserves capital but may alter ownership dynamics.
  
• Combining the buyback with refinancing or group restructuring, particularly in more complex corporate groups.
  

Each option carries different legal, tax, and accounting implications and must be assessed carefully.

Tax Treatment of Share Buybacks

Income vs capital treatment for shareholders
A central issue in any share buyback is whether the payment to the selling shareholder is treated as income or capital for tax purposes. The relevant criteria are set out in Chapter 3 of Part 23 of the Corporation Tax Act 2010 and sections 1033 to 1043 of that Act, as applied through the Income Tax Act 2007.

By default, payments made on a share buyback are treated as distributions and taxed as income. However, in certain circumstances, the payment can qualify for capital treatment, which may be more tax-efficient for shareholders.

To qualify for capital treatment, strict conditions must be met, including:

• The buyback must be for the benefit of the company’s trade, as defined in section 1033 of the Corporation Tax Act 2010.
  
• The selling shareholder’s interest in the company must be substantially reduced, ensuring a genuine change in ownership.
  
• The shareholder must not remain connected with the company following the buyback, subject to limited statutory exceptions.
  
• The transaction must not form part of a tax avoidance arrangement, assessed by reference to motive and surrounding circumstances.
  

HMRC clearance and certainty
Because of the complexity and potential tax exposure, advance clearance from HMRC is often advisable. Clearance is normally sought under section 1044 of the Corporation Tax Act 2010, confirming that capital treatment applies under sections 1033 to 1043.

Jonathan Lea Network works closely with specialist tax advisers to assess eligibility, structure the buyback correctly, and manage the clearance process where certainty is required.

Share Buybacks and Directors’ Duties

Understanding director responsibilities
Directors involved in a share buyback must comply with their duties under sections 171 to 177 of the Companies Act 2006. These include acting in the best interests of the company, exercising reasonable care and skill, and avoiding conflicts of interest.

Directors must also ensure compliance with the capital maintenance principle under section 658 of the Companies Act 2006, which prohibits a company from financing a buyback out of capital except via specific statutory procedures. They must be satisfied that the company will remain solvent following the transaction.

Insolvency and creditor considerations
If a company is, or may become, insolvent, a share buyback may be challenged under the Insolvency Act 1986. Relevant provisions include sections 238 and 239, which govern transactions at an undervalue and preferences, and may allow a liquidator to seek recovery of funds.

Early financial analysis and careful documentation are essential to mitigate these risks.

Practical Issues to Address in a Share Buyback

Valuation and fairness
Agreeing a fair price for the shares is often one of the most sensitive aspects of a buyback. Independent valuation is sometimes advisable, particularly where directors or remaining shareholders may face allegations of unfairness.

Shareholder approvals and documentation
Buybacks require careful documentation, including:

• The buyback contract.
  
• Board and shareholder resolutions.
  
• Updated statutory registers and filings at Companies House, including filing Form SH03 (Return of Purchase of Own Shares) within 28 days of the transaction.
  

Errors or omissions can invalidate the buyback.

Impact on existing agreements
Shareholder agreements, investment documents, and banking facilities may contain restrictions on share buybacks. These must be reviewed early to avoid breaches or consent issues.

Risks of Poorly Planned Share Buybacks

Unexpected tax liabilities
If capital treatment is not available, shareholders may face higher income tax charges than anticipated. These outcomes are often irreversible once the buyback completes.

Invalid or unenforceable buybacks
Failure to comply with statutory requirements can result in the buyback being void, requiring repayment of funds and remedial action.

Director liability and disputes
Poor process or documentation can expose directors to personal risk and create disputes between remaining shareholders.

Why Jonathan Lea Network is Trusted for Share Buybacks

Specialist restructuring expertise
Jonathan Lea Network advises on share buybacks as standalone transactions and as part of wider reorganisations, including capital reductions, demergers, and succession planning.

Commercial and pragmatic approach
We focus on achieving practical outcomes that work for both the company and its shareholders, not just technical compliance.

Partner-led teamwork
Clients work directly with experienced lawyers who coordinate across corporate, tax, and commercial disciplines, ensuring clarity and efficiency throughout the process.

Transparency and value for money
We provide clear scoping, realistic timelines, and cost transparency, helping clients make informed decisions without unnecessary complexity.

Common Client Concerns We Help Resolve

Can the company afford a buyback?
We assess distributable reserves, cash flow, and solvency to ensure the buyback is financially sustainable.

Will HMRC challenge the tax treatment?
We identify risks early and seek advance clearance where appropriate to provide certainty.

Does everyone have to agree?
Not always, but shareholder approvals are required. We advise on the necessary thresholds and protections.

How long does a share buyback take?
Timelines vary depending on complexity and whether HMRC clearance is sought. We provide clear guidance from the outset.

Take the Next Step – Speak to Our Share Buyback Specialists

Exit shareholders smoothly and protect the business
Our UK share buyback lawyers advise both companies and shareholders on ensuring transactions comply with the Companies Act and achieve optimal tax treatment. A share buyback can be a powerful tool for restructuring ownership, resolving disputes, and planning succession, but only when structured correctly.

Jonathan Lea Network advises companies and shareholders on share buybacks with clarity, confidence, and commercial focus. We manage the process from initial feasibility through to completion and post-transaction support.

To discuss whether a share buyback is right for your business, call us on +44 (0)1444 708 640 , or email us to arrange a confidential discussion with one of our corporate restructuring specialists. 

This overview is for general information only and does not constitute legal or tax advice.