A company purchase of own shares can be an efficient way of extracting cash from a family company to discharge a liability for Inheritance Tax on a death. It allows the company to control who owns the company's shares. It also enables the shareholder who is selling their shares to receive cash for them without the other shareholders having to find the money themselves.

A payment for a company's purchase of own shares can be treated as an income distribution or, in the case of an unquoted trading company, as a capital payment. Which treatment is the most tax efficient depends on the circumstances of the estate.

Capital treatment can apply if the whole, or substantially the whole, of the payment for the purchase is used to discharge a liability for Inheritance Tax on a death. Even if all the other conditions are met, however, capital treatment will apply only to the extent that the liability cannot be otherwise discharged without undue hardship. Any part of the payment used to discharge part of the liability that can be otherwise discharged without undue hardship, will be treated as an income distribution.