Company buying back shares? Watch out for forthcoming changes

In its response to its consultation, the government confirms that it will proceed with reforms to the tax treatment of company distributions, reductions of share capital and purchases of a company's own shares. These are intended to apply from April 2028, with draft legislation due for further consultation in 2027. The aim is to prevent owners from extracting the accumulated profits of a business they continue to control at capital gains tax rates instead of the income tax rates applying to dividends. A capital gain can currently be taxed at 24%, or less where a relief applies, whereas an additional rate dividend may be taxed at 39.35%.

A share buyback can currently qualify for capital gains treatment where detailed conditions are met, including rules about the seller's shareholding and the benefit to the trade. The proposed changes would replace some of the more subjective tests with clearer conditions. One proposal is a minimum 5% shareholding: a retiring shareholder who owns 4% of a family company might therefore struggle to obtain capital treatment, even where their departure is entirely commercial. The government has acknowledged concerns about minority shareholders and family-business successions, so the exact requirements are not yet settled.

This is not a ban on genuine business sales or share buybacks. However, owners contemplating an exit, a company-funded retirement or a reorganisation should review the possible tax treatment now, rather than waiting until the new rules are imminent. Nor should they rush to extract cash merely to beat an anticipated deadline: existing share-buyback conditions and anti-avoidance rules already matter, and the final legislation may contain important safeguards. The key distinction will be between receiving sale proceeds for a genuine departure and taking profits out of a business you effectively retain.