Lambert Chapman LLP's Richard Thomson looks at Company Share Buy Backs

We are often approached by the owner/managers of companies when a shareholder has announced their intention to leave and to dispose of their shareholding. The remaining shareholders are normally concerned that the shares could be sold to a third party which will bring in outside influence. There will also be the question of financing the acquisitions should the existing shareholders decide to purchase the shares.

As an alternative to an existing shareholder purchasing the shares, Company Law provides a mechanism whereby an unquoted company is able to purchase the shares. The shares are then cancelled. In deciding if a company share buy back is appropriate, consideration will need to be given to the effect on the percentage holdings of the remaining shareholders. This is likely to change and could result in control of the company changing.

The company will also need to have monies available to purchase the shares. However, following the transaction, it is possible for monies to be put on loan back to the company. In the hands of the individual, the purchase of the shares will be treated as an income distribution unless the transaction qualifies as capital.

There are various conditions which need to be met for the share buy back to qualify as a capital distribution. It is normally the intention to ensure the transaction is treated as a capital distribution due to the favourable Capital Gains Tax Regime. Advance clearance is available from HM Revenue & Customs.

Under the Capital Gains Tax regime, the tax rate for the individual, if qualifying for Entrepreneurs Relief, will be at 10%.

Advantages of a Company Share Buy Back

There can be significant advantages in performing a company share buy back. These include:

• The exit of a shareholder can be funded when the existing shareholders do not have the appetite or the funds available to purchase the shares.
• The existing shareholders are able to retain ownership and management of the company, without any influence from a third party.
• If the share buy back qualifies as a capital transaction, a relatively low rate of tax may be charged on the disposal.

We have assisted many clients in undertaking share buy backs and in obtaining HM Revenue & Customs clearance for the transaction.for more information please contact Richard on 01376 326266 or your Lambert Chapman LLP contact.

Date:20 November 2009

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