Share buy-back satisfied 'trade benefit' test and was taxable as a capital gain and not a distribution

In Boulting v HMRC [2025] UKFTT 1272 (TC), the First-tier Tribunal (FTT) allowed the taxpayer’s appeal, finding that the purchase of shares met the 'trade benefit' test in section 1033, Corporation Tax Act 2010 (CTA 2010) and was therefore taxable as a capital gain and not as a distribution.

Background

John Boulting was the majority shareholder and a director of PSC Training and Development Group Ltd (PSC), having built the business from the 1990s. By 2013/14, serious management tensions had developed within PSC, which created instability, contributed to resignations at a senior level, and prevented the other directors from running the business effectively. It was  decided that Mr Boulting would retire from the business.

A planned exit was negotiated whereby PSC would buy eight of Mr Boulting’s shares for £4.8m, with most of his remaining shares gifted to his son to facilitate succession. PSC applied for, and received, HMRC clearance under section 1033, CTA 2010, that the purchase of own shares would be treated as a capital gain, rather than a distribution. The purchase was completed in January 2015 and duly included in Mr Boulting's 2014/15 tax return (the Return) as giving rise to a capital gain eligible for Entrepreneurs’ Relief (as it then was).

HMRC subsequently opened an enquiry into the Return. As a result of its enquiry, HMRC determined that the sale of the shares constituted a distribution to Mr Boulting that was subject to income tax. HMRC claimed that the purpose of the payment was mainly to reward Mr Boulting for his past investment and activity and to extract cash from the business, rather than being wholly or mainly for the benefit of the trade, such that the conditions in section 1033 were not satisfied. HMRC also said that the clearance it had previously given was void because the share value used was materially greater than market value and this had not been disclosed to it in the clearance application.  HMRC issued a closure notice on this basis amending the Return and increasing Mr Boulting's tax liability by £1,008,621.39. 

Mr Boulting appealed the closure notice to the FTT.

FTT's decision

The appeal was allowed. 

The central issue before the FTT was whether the purchase was made 'wholly or mainly for the purpose of benefiting the company’s trade' such that the conditions in section 1033 were satisfied. HMRC's position was that the purchase of Mr Boulting's shares was not necessary to benefit the trade because the business was already profitable and growing and there was no clear evidence that the purchase was essential to unlock investment, or resolve any deadlock. HMRC also argued that because (in its view) the price paid was excessive, it followed that it could not be regarded as a payment whose whole or main purpose was to benefit PSC’s trade. HMRC contended that the purchase was simply a mechanism to remunerate Mr Boulting.

Mr Boulting argued that the price paid was not excessive and that the purchase was wholly or mainly for the purposes of benefitting the trade, as it removed a majority shareholder who had been blocking investment and who would not relinquish key decision-making responsibility.

In rejecting HMRC's arguments, the FTT found that the share purchase was a necessary part of resolving serious management deadlock within PSC. Although the group was profitable, the FTT accepted the evidence advanced by Mr Boulting that this position was not sustainable without further investment, which Mr Boulting consistently blocked. The FTT found that Mr Boulting's continued control was hindering the business and the company regarded his exit as essential to protect and advance its trade. The sale purchase was therefore undertaken to facilitate that exit, without which the wider succession plan could not proceed.

In reaching its conclusion, the FTT stressed that the statutory test focuses on the company’s purpose, not the seller’s motives. PSC’s purpose was to remove a blocking shareholder, not to reward past involvement or extract cash from the business. 

The FTT also rejected HMRC’s criticisms of the valuation of the shares, concluding that the valuation was a genuine commercial exercise and that the negotiated price did not indicate a non-trade motive. In the view of the FTT, the dominant purpose of the purchase was to benefit PSC’s trade by enabling effective management and necessary investment and that any extraction of cash was simply an effect, rather than the purpose, of the transaction.

The FTT therefore concluded that the purchase was made wholly or mainly for the purpose of benefiting PSC’s trade and that Condition A in section 1033 was satisfied. Accordingly, the purchase consideration was correctly subject to capital gains tax and not income tax.

Comment

This decision confirms that the 'trade benefit' test in section 1033, requires a purposive enquiry focused on the company’s commercial objectives, rather than on valuation issues, or the seller’s personal motivation.

The FTT has demonstrated in this decision that where a share buy-back is part of a genuine and commercially necessary exit to resolve management dysfunction, it is prepared to recognise a trade benefit even if the business appears profitable at the time, or if valuation is imperfect.

The decision also strengthens the position of family companies and owner-managed businesses undertaking purchase of own share transactions for succession or governance reasons, especially where management conflict threatens commercial performance.

The decision can be viewed here.