Taxes Consolidation Act 1997 section 178

Conditions as to reduction of vendor's interest as shareholder

Section 178 specifies the conditions regarding the substantial reduction of a seller's shareholding that must be met for capital gains tax (CGT) treatment to apply when a company buys back its own shares.

• After the buyback, the nominal value of the seller's shares, expressed as a percentage of the company's issued share capital, must not exceed 75% of the corresponding percentage before the buyback (i.e. at least a 25% reduction is required).
• The shareholdings of the seller's associates are included when calculating the seller's interest; an associate's holding is only counted if that associate still owns shares immediately after the buyback.
• The seller's entitlement to a share of the company's distributable profits must also not exceed 75% of the pre-buyback entitlement, calculated on the assumption that the company distributes all available profits.
• Shares bought back by the company are treated as cancelled for tax purposes, reducing the issued share capital used in the calculation — meaning the seller must typically sell more than 25% of their original holding to meet the test.