Readers' forum: Goodwill payment

We have encountered a situation where an unlisted trading company undertook a buyback of its own shares from two non-employee shareholders approximately three years ago but it has only now come to light that the transactions were void.

After taking legal advice the buy-backs have now been completed properly and because the current circumstances are different one of the two former shareholders is now facing an income tax charge on proceeds taxable as a distribution. The earlier void buyback would have instead given rise to a capital gain covered by the annual exemption. The company feels morally obliged to meet the former shareholder’s unexpected income tax liability.

Our question is whether the company’s payment of the former shareholder’s income tax liability can be regarded in the former shareholder’s hands as non-taxable – in essence an ex gratia goodwill payment. Alternatively could it be construed...