Most payments a company makes to its shareholders, in respect of their shares, will be qualifying distributions and may be subject to Income Tax.

If certain conditions are met, the payment can be treated as an exempt distribution. An exempt distribution is a payment that is not treated as a distribution. It is treated as consideration for the disposal of shares and is subject to CGT.

When a company makes a purchase of its own shares, any excess paid over the amount of capital originally subscribed for the shares is usually treated as a distribution. However, there are special provisions that enable an unquoted trading company or an unquoted holding company of a trading group to undertake a purchase of its own shares without making a distribution.

In order to do this, a clearance application may be made. Under this procedure a company wishing to make a purchase of its own shares can obtain advance confirmation from HMRC that the distribution arising will be an exempt distribution.

If the application is approved, the payment is treated as consideration for the disposal of the shares in the hands of the seller and subject to CGT. Where entrepreneurs' relief is available, CGT of 10% is payable in place of the standard rate. There are a number of qualifying conditions that must be met in order to qualify for the relief. Where the necessary conditions are met a company purchase of own shares can be a tax efficient way of exiting a business.