HMRC Consultation: Reforming the Purchase of Own Shares Rules

On 23 June 2026, HMRC opened a 12-week consultation on modernising the tax framework for distributions and repayments of capital from companies. Among the most significant proposals is a overhaul of the Purchase of Own Shares (POS) relief rules under Section 1033 CTA 2010 — the provisions that determine whether a company buyback of its own shares is taxed as a capital gain or as an income distribution.

The consultation closed on 14 September 2026, and while the government has not yet published its response, the proposals signal a clear direction of travel: replacing the longstanding, subjective "trade benefit test" with a mechanical set of requirements that could fundamentally change how departing shareholders are taxed.

What Is Purchase of Own Shares Relief?

When a company buys back its own shares, any amount paid to a shareholder that exceeds the capital originally subscribed for those shares is generally treated as a distribution — chargeable to Income Tax at dividend rates of up to 39.35% for higher and additional rate taxpayers.

However, Section 1033 CTA 2010 provides a relief that allows the payment to be treated as a capital distribution instead, subject to Capital Gains Tax (CGT). This is significant: CGT rates are substantially lower than Income Tax rates on dividends, and the shareholder may also benefit from CGT reliefs such as Business Asset Disposal Relief (BADR), which can reduce the effective rate to as low as 14% on the first £1 million of lifetime gains.

To qualify for POS relief under Condition A (S1033(2) CTA 2010), the following conditions must currently be met:

• The repurchase is by an unquoted trading company, or the unquoted holding company of a trading group, which is not a 51% subsidiary of a quoted company
• The repurchase is wholly or mainly for the purpose of benefiting a trade carried on by the company or any of its 75% subsidiaries
• The shares are bought back from a UK resident vendor who has held the shares for a minimum period of five years
• As a result of the repurchase, the vendor reduces their interest in the company by at least 25%
• The vendor is not connected with the company after the repurchase has taken place

Condition B (S1033(3) CTA 2010) deals with POS relief in cases of discharging an Inheritance Tax liability due to undue hardship. The government has confirmed it does not intend to change Condition B.

The Problem: The Trade Benefit Test

The second condition — that the repurchase must be "wholly or mainly for the purpose of benefiting a trade" — is the most contentious. This "trade benefit test" derives from HMRC's Statement of Practice 1982 and is inherently subjective.

In practice, this means that even where a company buys back shares from a genuinely departing shareholder, HMRC can challenge whether the buyback truly benefits the trade. The test has become a significant source of dispute between taxpayers and HMRC, creating uncertainty for business owners planning their exit and for advisers structuring buybacks.

The government's concern is that the subjectivity of the test makes it difficult for taxpayers to know in advance whether relief will apply, and difficult for HMRC to administer consistently.

The Proposed New Requirements

The government proposes to replace the trade benefit test with a more mechanical set of requirements. Under the consultation proposals, capital treatment would only be available where all of the following conditions are satisfied:

1. Minimum 5% Holding and Two-Year Working Period

The departing shareholder must have held a minimum of 5% of the company's equity for at least the two years prior to their departure. Crucially, they must also have worked for the company throughout that period.

This is a significant tightening. Under the current rules, there is no minimum shareholding threshold and no explicit requirement that the shareholder must be a working officer or employee. A minority shareholder holding, say, 2% of the shares who has been with the company for five years could currently qualify for relief — under the proposals, they would not.

2. Complete Exit Required

The departing shareholder must surrender their entire shareholding and any directorships on departure. The consultation is explicit that departing shareholders may no longer retain any shareholding "for sentimental reasons."

This removes a common practice where a retiring founder or director retains a small nominal shareholding to maintain a connection with the business. Under the proposals, even a single token share would disqualify the buyback from capital treatment.

3. Tranche Buybacks Within Two Years

The proposals recognise that a company may not have sufficient distributable reserves to fund a full buyback in one transaction. To accommodate this, buybacks carried out in tranches will remain within the relief, provided the shareholder fully exits within two years of the first tranche.

This is a helpful concession, but it introduces a new timing pressure. Under the current rules, there is no statutory deadline for completing a phased buyback — the only requirement is that each individual repurchase reduces the vendor's interest by at least 25%. The two-year window under the proposals is a new constraint that will require careful planning.

4. Market Value Consideration

The company must take reasonable steps to ensure that the consideration paid for the shareholding does not exceed market value.

This is not entirely new in substance — paying above market value has always risked the excess being treated as a distribution — but codifying it as an explicit condition of the relief places a positive obligation on the company and its directors. Companies will need to demonstrate that they have taken reasonable steps, which in practice will mean obtaining a formal valuation in many cases.

5. Extended Five-Year Period for Family Connections

Where the departing shareholder retains family connections with remaining shareholders or directors, the holding and working period requirements are extended from two years to five years.

This anti-avoidance measure is aimed at situations where family members are able to provide a source of capital extraction while not meaningfully working for the company. The government's concern is that in family companies, a relative who holds shares but does not genuinely work in the business could use the POS relief to extract value at capital rather than income rates.

The extension to five years will mean that in family company scenarios, the departing shareholder must demonstrate a longer and more substantial working history before qualifying for relief.

6. Five-Year Anti-Resurfacing Rule

If capital treatment is awarded to the departing shareholder, and they become a director or shareholder of the company again at any time within five years of leaving, the relief will be withdrawn and the distribution will be chargeable to Income Tax in the original year of departure.

This is a powerful clawback provision. It means that a departing shareholder cannot return to the company — even in a different capacity — for a full five years without triggering a retrospective reclassification of the payment from capital to income. The tax cost could be substantial, particularly where BADR has already been claimed.

There is one exception: where a previously departed shareholder receives shares via inheritance, this will not trigger a withdrawal of the relief, provided that reasonable steps are taken to dispose of the shares as soon as practicable.

What This Means for Business Owners

These proposals, if implemented in their current form, would represent the most significant change to the POS regime in decades. Several practical implications stand out:

Smaller shareholders could lose relief entirely. The 5% holding threshold is a new gate that did not exist before. Shareholders holding below 5% — however long they have been with the company — would be unable to access capital treatment on a buyback. For employee shareholders in growing businesses, this could mean the difference between a 14% CGT rate (with BADR) and a 39.35% Income Tax rate.

Complete exit becomes mandatory. Business owners who wish to retain a nominal shareholding on retirement — a common and understandable desire — would need to choose between keeping that connection and accessing capital treatment. In many cases, the tax saving from capital treatment will far outweigh the sentimental value of a token share.

Family companies face additional scrutiny. The extended five-year holding and working period for shareholders with family connections, combined with the five-year anti-resurfacing rule, will make POS relief significantly harder to access in family company scenarios. Advisers will need to document working histories carefully and plan exits well in advance.

Valuations become more important. The explicit market value condition means that companies should obtain professional valuations before proceeding with a buyback, and retain evidence of the steps taken to ensure the price does not exceed market value.

Transche buybacks need a timeline. Companies planning phased buybacks will need to ensure the shareholder fully exits within two years. This may require accelerating a buyback schedule or ensuring sufficient distributable reserves are available within the window.

The Wider Consultation Context

The POS proposals sit within a broader consultation covering eight chapters of reform to the distributions framework. Other chapters address:

• The treatment of "new consideration" and "capital on the shares" in reductions of capital (Chapter 2)
• Reform of the demerger relief provisions (Chapter 3)
• Aligning the Income Tax treatment of dividends from non-UK resident companies with UK resident companies (Chapter 4)
• The interaction between the distributions regime and the loans to participators regime, including a proposed priority rule (Chapter 5)
• Extending the loans to participators regime to loans from non-UK resident close companies (Chapter 6)
• Modernising the Transactions in Securities (TIS) provisions (Chapter 8)

The government has emphasised that these proposals are not intended to affect corporate shareholders directly, and that the general exemption under Part 9A CTA 2009 should preserve that position. However, it has invited responses on any unintended consequences for Corporation Tax payers.

What Should Business Owners Do Now?

The consultation has closed, but no legislation has been enacted. The government has stated it will only proceed with reforms "where doing so is in line with the government's objectives" and after considering the impacts on commercial activity, growth and investment.

For business owners contemplating a share buyback, the key takeaways are:

1. Act now if you are planning a buyback under the current rules. If your circumstances meet the current conditions — particularly if you hold below 5% or wish to retain a nominal shareholding — proceeding before any legislative change could lock in capital treatment under the existing, more flexible regime.

2. Review your shareholding structure. If you hold below 5% of the company's equity, consider whether a buyback is the right exit route, or whether an alternative structure (such as interposing a holding company, as illustrated in Annex A of the consultation) might achieve a similar result.

3. Document your working history. Under both the current rules and the proposals, evidence that the shareholder has been genuinely working for the company is likely to become more important. Maintain records of your role, responsibilities and time commitment.

4. Obtain a professional valuation. The market value condition, if enacted, will place a positive obligation on the company to demonstrate reasonable steps were taken. A professional valuation provides both protection and evidence.

5. Plan your exit timeline. If you intend to retain any connection with the company — as a consultant, advisor, or through family shareholdings — factor in the five-year anti-resurfacing rule and the extended holding period for family connections.

How Newshams Can Help

The reform of the POS rules is a technical and fast-moving area. At Newshams Tax Advisers, we advise businesses, shareholders and their advisers on share buybacks, company restructurings and the interaction between the distributions regime and capital gains reliefs.

If you are planning a share buyback, considering your exit from a company, or concerned about how these proposals might affect your tax position, we can help you navigate the current rules and plan for the changes ahead. Contact us to arrange an initial consultation with one of our specialist tax advisers.