[The following example is based on a past Chartered Institute of Taxation (CIOT) exam question, updated to reflect current tax rules, rates and allowances, and it is used with their permission. The question and answer have been edited to focus on the issue relevant here – the tax treatment of a buy-back.]

You are a tax manager working for a firm of Chartered Accountants. Your firm acts for Prospect Developments Ltd, a house builder, and its shareholders. The partner responsible for the client is Joe Mills. The company and its shareholders are all UK resident.

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