Share buybacks can be an important tool for shareholders to extract value and for companies to remove shareholders. For individual shareholders, obtaining capital treatment on a buyback results in a more favourable tax position than if the proceeds are treated as an income distribution, but there are a number of statutory conditions that must be met for this to apply. 

In the recent case of Boulting v HMRC [2025] UKFTT 1272 (TC) the FTT considered those conditions. Specifically, the FTT was asked to consider the application of Condition A under section 1033 CTA 2010. The central limb of Condition A – and the point in dispute in this case – is that the buyback must be made wholly or mainly for the purpose of benefiting a trade carried on by the purchasing company or its 75% subsidiaries.

In light of the upcoming restrictions to Business Property Relief from inheritance tax from April 2026, this case may be of particular interest to those planning to use share buybacks as a means of funding unanticipated IHT liabilities as tax efficiently as possible.

The facts

Mr Boulting was the founder, largest shareholder and chairman of a training business (STG). Following persistent disputes among the board about the future direction and investment needs of the business, it was agreed that Mr Boulting would step back and retire, selling some of his shares and giving the remainder to his family. The exit plan eventually agreed between Mr Boulting and STG involved him selling eight of his shares back to the group for £4.8m (based on an internal valuation and subsequent negotiation), gifting 38 shares to his son (STG’s managing director), and retaining four shares to give to his grandchildren (which he duly did in 2016). 

In October 2014, HMRC granted advance clearance confirming, pursuant to section 1044 CTA 2010, that the buyback of Mr Boulting’s shares would meet Condition A, such that capital treatment would be available to Mr Boulting. However, in 2019 HMRC amended Mr Boulting’s tax return, recharacterising the £4.8m buyback proceeds as an income distribution, and increasing his tax payable by over £1m.

HMRC’s challenge

HMRC argued that: 

• the advance clearance was void because the price at which the shares were bought back was a material fact that was not disclosed;
• the purchase price was excessive relative to the market value of the shares bought back, implying a non-trade benefit main purpose;
• the training business was profitable at the time of the buyback and so any disruption being caused to the business by the disagreement of the board could not have been sufficient to mean that a trade benefit would be obtained by Mr Boulting’s retirement; and
• finally, that the trade benefit test is unlikely to be met if a seller does not sell back all of their shares to the company (relying on HMRC’s Statement of Practice 2/82): “If the company is not buying all the vendor's shares save for the small number held back for sentimental reasons, it would seem unlikely that the transaction could benefit the company's trade so that the trade benefit test will probably not be satisfied”. 

FTT Decision

The FTT allowed Mr Boulting’s appeal. 

The FTT held that the correct statutory question under Condition A is, in essence, to ask, “why were the shares purchased at all?”, and not, “why was this price paid for these shares?”. In addition, the statutory conditions do not require that the buyback transaction in isolation achieves the trade benefit; the trade benefit test can be met where a buyback transaction, taken together with connected steps, serves to benefit the trade. 

On the facts, the FTT found that the company’s purpose in carrying out the buyback was to secure Mr Boulting’s departure from the business to benefit the trade by removing board deadlock over investment plans. The Tribunal emphasised that it is the company’s, not the seller’s, purpose in entering the buyback that matters for the trade benefit test. The FTT accepted on the evidence that the trade would benefit from Mr Boulting’s retirement from the business, rejecting HMRC’s suggestion that a profitable business cannot stand to benefit from the removal of a dissenting shareholder. 

The Tribunal was unpersuaded that the price for the buyback demonstrated a non-trade purpose. There had been a bona fide valuation exercise, and negotiations had anticipated (as would be common) a reduction from an initial high figure. Expert evidence produced for the appeal showed a valuation range that was broadly consistent with the price eventually agreed. The absence of a minority discount did not undermine the company’s purpose in entering into the buyback, given the founder’s position and the real prospect of an external sale at pro rata value via drag along rights. 

The FTT also found that HMRC’s reliance on SP 2/82 did not assist: partly because the statement is guidance and not law, but also on account of the fact that, when read in context, the relevant sentence in the guidance contemplated a situation where the vendor remains a continuing (substantive) shareholder. Here, all of Mr Boulting’s shares were disposed of through connected arrangements, and the purchase by the company was a prerequisite to that.

Significance of the case

The decision is helpful in outlining the approach to the trade benefit test; which should be assessed: 

1. from the perspective of the purchasing company alone; and
2. in the round.

This is a little-litigated area – largely on account of the advance statutory clearance facility under section 1044. The fact that this case made it as far as the FTT is a reminder that a clearance does not guarantee a transaction from challenge if HMRC considers that material facts were incomplete, inaccurate or have changed, and that HMRC will pursue such cases to the fullest extent.

Taxpayers should continue to ensure full and clear disclosure of all relevant facts in clearance applications. It is also a helpful reminder of the importance of contemporaneous evidence; on the facts of this case, extensive and robust board minutes documenting the discussions taking place around Mr Boulting’s dissent and eventual exit from the business were crucial in overcoming HMRC’s challenge.