Entrepreneurs' Relief (now Business Asset Disposal Relief) on a Share Buyback

Note on terminology: "Entrepreneurs' Relief" was renamed Business Asset Disposal Relief (BADR) by Finance Act 2020. The underlying statutory provisions in TCGA 1992, Chapter 3 of Part V remain largely the same. This answer uses both terms as appropriate.

What the law says

1. The relief and its rate

BADR/Entrepreneurs' Relief provides a lower rate of CGT in respect of qualifying business disposals. The qualifying categories are: a material disposal of business assets (s.169I), a disposal of trust business assets (s.169J), and a disposal associated with a relevant material disposal (s.169K).

2. CGT treatment of a share buyback

When a company buys back its own shares, the shareholder is treated under TCGA 1992 s.122 as having disposed of an interest in the shares in consideration of the capital distribution received. A "capital distribution" means any distribution from a company in money or money's worth except a distribution which in the hands of the recipient constitutes income for the purposes of income tax.

This is critical: if the buyback proceeds are treated as income (under CTA 2010 Part 23 — the "purchase of own shares" income tax rules), they fall outside the CGT regime entirely and BADR cannot apply. BADR is only relevant where the proceeds are treated as a capital receipt.

3. Conditions for BADR on a disposal of shares (s.169I)

A disposal of shares is a material disposal of business assets if Condition A is met: throughout the period of 2 years ending with the date of disposal —

• (a) the company is the individual's personal company and is either a trading company or the holding company of a trading group, and
• (b) the individual is an officer or employee of the company (or of a group member).

4. The "associated disposal" route and share buybacks — an important exclusion

Under s.169K (disposal associated with a relevant material disposal), Condition A2 requires a material disposal of shares. However, the legislation expressly provides that Condition A2 is NOT met if the disposal of shares is a disposal by virtue of section 122 (i.e. a capital distribution / share buyback), unless it is a capital distribution made in the course of dissolving or winding up the company.

This means that an ordinary (non-winding-up) share buyback cannot qualify as an associated disposal for BADR purposes under Condition A2.

5. The income tax / CGT boundary on a buyback

Under CTA 2010 s.1035, the shares must have been owned by the seller throughout the 5 years ending with the date of purchase for the buyback to qualify for capital (rather than income) treatment. Where the income tax conditions are not met, the excess over the repayment of capital is treated as a distribution subject to income tax — and BADR is irrelevant to that portion.

HMRC guidance / practice

BADR rate and how it works

BADR "determines the rate at which CGT will be charged on a gain that relates to disposals of qualifying business assets as long as certain conditions have been met". BADR affects the rate at which CGT is calculated rather than deducting a figure from the gain.

Practical interaction with EIS disposal relief

Case law illustrates the interaction between BADR/Entrepreneurs' Relief and share buybacks in practice. In HMRC v [the Taxpayers] (UT, 2024), shareholders structured a buyback so that the consideration equalled the share premium account (a return of capital), meaning no income tax arose and EIS disposal relief eliminated any CGT. The Upper Tribunal confirmed that the taxpayers' main purpose was to crystallise EIS disposal relief (a CGT relief), not to obtain an income tax advantage — and allowed their appeal against a transactions-in-securities counteraction notice.

Summary

The key practical point is that BADR on a share buyback is only available where: (1) the proceeds are treated as capital (not income), and (2) the shareholder independently satisfies the s.169I material disposal conditions in their own right.