A share buyback is when a company buys shares back from one of its own shareholders, using the company’s money rather than the money of another owner. In the UK it’s also called a purchase of own shares. In a private company it’s often used when a shareholder wants out and nobody else wants to buy their shares personally.
Because a buyback is normally funded from distributable profits, the company’s accounts show whether it can go ahead before any contract is drafted.
I’ve invested in more than 100 businesses and started and run over 30 of my own, so I’ve seen shareholders leave companies as a founder and as an investor.
When a Company Buys Back Its Own Shares
A buyback gives a shareholder a way out of a private company, where there’s no stock market to sell on. The company becomes the buyer, and the shares it buys are usually cancelled. Every remaining shareholder then owns a bigger percentage without putting in any money.
Things like these commonly lead to a buyback:
- a co-founder leaving the business, often under the leaver terms that sit alongside a vesting schedule
- an early investor or a friends and family shareholder who wants their money back
- a shareholder retiring, or the estate of a shareholder who has died
- the end of a shareholder dispute, where one side agrees to sell
- tidying up the shareholdings before an investor comes in or before the business is sold
The rules sit in Companies Act 2006, Part 18. Section 690 lets a limited company buy its own shares unless its articles of association restrict or prohibit it. The shares have to be fully paid, and the company has to pay for them in full when it buys them.
Distributable Reserves and Funding
Distributable reserves are the company’s accumulated realised profits, less its accumulated realised losses, that haven’t already been paid out as dividends. They’re the same pot a company pays dividends from.
Under section 692, a private company can fund a buyback in 3 ways.
Distributable profits. This is the normal route. If the buyback price is £450,000, the company needs at least £450,000 of distributable reserves. The last filed accounts show the figure, and if they’re out of date the directors can prepare interim accounts to show the position now.
The proceeds of a fresh issue of shares. The company issues new shares, often to an existing shareholder or a new investor, and uses that money to buy the departing shareholder’s shares. Existing shareholders’ pre-emption rights apply to the new shares unless they’re disapplied.
Capital. A private company without enough distributable reserves can buy back out of capital, under Chapter 5 of Part 18. The directors sign a statement that the company can pay its debts for the following year, the auditors report on it, the shareholders pass a special resolution, and a notice goes in the Gazette and a national newspaper so creditors can object. The payment is made no earlier than 5 weeks and no later than 7 weeks after the resolution.
There’s also a small exception. If its articles allow it, a private company can buy back out of capital without that process, up to the lower of £15,000 or 5% of its fully paid share capital in a financial year. The 5% is measured on nominal share capital, so in a company with £100 of share capital it allows £5 a year.
Because the shares have to be paid for on completion, a company that can’t fund the whole price at once can agree a contract that buys the shares in stages. Each tranche is completed and paid for in full when the company has the reserves.
The Share Buyback Process, Step by Step
An off-market purchase, the type every private company buyback is, follows the same order each time.
- Check the articles. Confirm they don’t restrict or prohibit a buyback, and check whether they allow the small capital exception if the company needs it.
- Check the distributable reserves. Use the last accounts or interim accounts to confirm the company can fund the price, and decide which of the funding routes it will use.
- Agree the price and draft the contract. The buyback contract sets out the number and class of shares, the price, the completion date and, for a staged buyback, each tranche.
- Hold a board meeting. The directors approve the terms and recommend them to the shareholders.
- Pass a shareholder resolution. Under section 694 the contract has to be approved by an ordinary resolution before the purchase, unless the articles ask for more. The shareholder selling can’t vote the shares being bought back. The contract has to be sent out with a written resolution, or be available for inspection before and at a meeting.
- Complete and pay. The company pays the full price for the shares, or for the first tranche, and the seller hands over their share certificate.
- Pay stamp duty and file the SH03. Stamp duty of 0.5% is due on the price when it’s over £1,000, rounded up to the nearest £5. The company sends form SH03, the return of purchase of own shares, to HMRC with the duty, then files it at Companies House with HMRC’s confirmation letter within 28 days of the purchase.
- File the SH06 and update the registers. Cancelled shares need form SH06, the notice of cancellation, with a new statement of capital. The register of members and the cap table are updated.
- Keep the contract. A copy has to be kept at the registered office for 10 years from the date the purchase completes.
On a £450,000 buyback the stamp duty is £2,250.
Share Buyback Tax: Income vs Capital Treatment
By default, a buyback payment is treated as a distribution, the same as a dividend. The seller pays income tax at dividend rates on everything above what was originally paid to the company for the shares. For 2026 to 2027 the dividend tax rates are 10.75% basic, 35.75% higher and 39.35% additional, after a £500 dividend allowance.
The payment can instead be taxed as a capital gain if the conditions in section 1033 of the Corporation Tax Act 2010 are met. The conditions include:
- the company is an unquoted trading company, or the holding company of a trading group
- the buyback is made wholly or mainly to benefit the company’s trade, and not to avoid tax
- the seller is UK resident in the tax year of the buyback
- the seller has owned the shares for 5 years, or 3 if they inherited them
- the seller’s interest is substantially reduced, meaning their share of profits falls to 75% or less of what it was
- the seller isn’t connected with the company afterwards, which broadly means holding no more than 30%
A shareholder selling all their shares and leaving the business usually meets the last 2 conditions. If the gain qualifies for Business Asset Disposal Relief as well, capital gains tax is 18% for disposals from 6 April 2026, otherwise it’s 18% or 24% depending on the seller’s income.
Say the departing shareholder paid £300 for their shares when the company was set up, and the company buys them back for £450,000. The illustrative example below assumes the seller’s other income already puts them in the additional-rate band:
| Treatment | Taxable amount | Rate | Tax |
|---|---|---|---|
| Income, as a dividend | £449,700 less the £500 allowance | 39.35% | £176,760 |
| Capital, with Business Asset Disposal Relief | £449,700 less the £3,000 allowance | 18% | £80,406 |
| Capital, without the relief | £449,700 less the £3,000 allowance | 24% | £107,208 |
A company can ask HMRC to confirm in advance that the payment qualifies for capital treatment. This is called advance clearance, under section 1044, and it’s applied for with the draft contract before any money changes hands. The tax treatment depends on the seller’s own position, so it needs checking by an accountant before the price is agreed.
Buyback vs a Sale to Another Shareholder
A departing shareholder can also sell their shares to one of the other owners, or to a new investor. The main differences are who pays and how the seller is taxed.
| Point | Company share buyback | Sale to another shareholder |
|---|---|---|
| Who pays | The company, from distributable reserves | The buyer, from their own money |
| Approval | Ordinary resolution approving the contract | Whatever the articles and shareholders’ agreement require for a transfer |
| Seller’s tax | Income tax as a dividend unless the capital conditions are met | Capital gains tax |
| Stamp duty | 0.5% over £1,000, paid by the company | 0.5% over £1,000, paid by the buyer |
| What happens to the shares | Usually cancelled, so every other holder’s percentage rises | Transferred, so only the buyer’s percentage rises |
Which one fits usually depends on whether the company has enough distributable reserves and whether any shareholder wants to buy the shares personally.
Share Buybacks Outside the UK
Most countries let a private company buy back its own shares, with a test of whether the company can afford it. The tests differ, and the tax treatment above is UK only.
- US. The rules come from the state the company is incorporated in. In Delaware, section 160 of the General Corporation Law stops a company buying its own shares when its capital is impaired or the purchase would impair it.
- Canada. Under the Canada Business Corporations Act, a company can’t buy back shares if it would fail a solvency test afterwards.
- Australia. The Corporations Act 2001 allows a buy-back that doesn’t materially prejudice the company’s ability to pay its creditors. Buying from one shareholder, a selective buy-back, needs shareholder approval, and the seller can’t vote.
- Singapore. The Companies Act 1967 allows buybacks if the constitution permits them, and the company has to be solvent when it pays.
- UAE. The rules depend on where the company is set up, onshore or in a free zone such as the DIFC or ADGM, each with its own companies regulations.
FAQs
Can a private company buy back its own shares?
Yes. A private limited company can buy back its own shares under Part 18 of the Companies Act 2006, unless its articles restrict or prohibit it. The purchase is normally funded from distributable profits.
How is a share buyback taxed?
A share buyback is taxed as a dividend by default, on the amount above what was originally paid for the shares. It can be taxed as a capital gain instead if the conditions in section 1033 of the Corporation Tax Act 2010 are met.
Does a share buyback need shareholder approval?
Yes. The buyback contract has to be approved by an ordinary resolution of the shareholders before the purchase, and the seller can’t vote the shares being bought. A buyback out of capital also needs a special resolution.
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This explains how share buybacks generally work for UK private companies. It isn’t legal or tax advice, and a solicitor and an accountant should advise before a buyback is agreed.
