Mark McLaughlin highlights a case in which the tax treatment of a company purchase of own shares was not as the taxpayer had hoped.
A company purchase of own shares (CPOS) is often a tax-efficient way for an individual shareholder to dispose of their shares (e.g. on retirement).
However, unexpected tax consequences can arise if a CPOS is not handled correctly.
Income treatment
As a general rule, when the company buys back its own shares from the shareholder, any ‘premium’ (i.e. payment in excess of the capital originally subscribed for the shares) constitutes a distribution of income (i.e. similar to a dividend).
If the proceeds are treated as an income distribution, it will probably be subject to tax at rates of 32.5% and/or 38.1%.
