The 5-year rule for share buybacks is a specific tax provision in the UK designed to offer advantageous capital gains tax treatment to certain shareholders when a company purchases its own shares from them.
Understanding the 5-Year Holding Period
This rule primarily benefits individuals who are both shareholders and active participants in the company. For the profit made from a share buyback to qualify for capital gains tax (CGT) treatment, rather than being taxed as income (which typically carries higher rates), two key conditions must be met:
- Shareholder Status at Buyback: The shareholder must be either an employee or a director of the company at the precise time the company buys back their shares.
- Minimum Holding Period: The shareholder must have held the shares for at least 5 years prior to the company executing the share buyback. This ensures that the shares were held as a long-term investment, not for short-term gains or as a disguised form of remuneration.
Tax Implications of the 5-Year Rule
When these conditions are satisfied, any profit the shareholder makes from the share buyback is treated as a capital gain, which can result in a significantly lower tax liability compared to income tax.
Here's a breakdown of the relevant Capital Gains Tax (CGT) rates for such profits:
| Period | Capital Gains Tax (CGT) Rate |
|---|---|
| Currently | 10% |
| From 6 April 2025 onwards | 14% |
This specific tax treatment is a crucial consideration for companies and their employee/director shareholders when planning a share buyback, as it can significantly impact the net proceeds received by the seller.
For more detailed information on company share buybacks, you can refer to resources like Gannons Solicitors.
