When does the relaxation under section 1043 apply to a share buyback?

The relaxation applies where the seller proposed or agreed to the share purchase specifically to enable an associate — such as a spouse, parent, child, or business partner — to achieve the substantial reduction in shareholding interest required for the associate's own shares. The seller need not personally meet the conditions in sections 1037 to 1042.

What is the tax effect of section 1043 on the seller's share buyback proceeds?

To the extent that the associate's substantial reduction is achieved through the seller's purchase, the payment for the seller's shares is treated as not being a distribution. This means the proceeds receive capital treatment under section 1033(2) rather than being taxed as income, preventing the cooperating seller from being penalised.

Why is the section 1043 relaxation important in practice for share buybacks?

Without section 1043, a shareholder who cooperated in a buyback to help an associate would have their proceeds taxed as income, even though the overall transaction achieved a legitimate commercial purpose. The relaxation ensures the seller is not disadvantaged for facilitating a share buyback arrangement involving a connected person.

Corporation Tax Act 2010 section 1043

Q: What does section 1043 of the Corporation Tax Act 2010 do?

Section 1043 relaxes the normal conditions for capital treatment when an unquoted trading company buys back shares. Where a seller agreed to the purchase specifically to help an associate meet the substantial reduction test for their own shares, the seller is treated as satisfying the conditions in sections 1037 to 1042, so the payment receives capital rather than income treatment.

Relaxation of requirements in certain cases

Section 1043 provides a relaxation of the normal conditions for capital treatment of a share purchase by an unquoted trading company, where the seller agreed to the purchase specifically to help an associate meet the substantial reduction test for their own shares.

Where a seller does not personally meet the conditions in sections 1037 to 1042 (such as the substantial reduction in shareholding interest), the requirements can still be treated as satisfied
The relaxation applies where the seller proposed or agreed to the share purchase specifically to enable an associate of the seller to meet the substantial reduction test for the associate's own shares
To the extent that the associate's substantial reduction is achieved through the seller's purchase, the payment for the seller's shares is treated as not being a distribution — that is, it receives capital treatment rather than income treatment
This recognises that in practice a shareholder may need to sell shares not for their own benefit but to facilitate the required reduction in an associate's shareholding interest

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